Comparing Debt Snowball and Avalanche Methods?

[Eagle]

I came across this resource: http://www.unbury.us/

It seems like it is a good comparison between the debt snowball (lowest balance) and avalanche (highest interest) methods. The avalanche being the better option. Thoughts?

[disneysteve]

Paying lowest balance first will always cost more than paying highest rate first. It's mathematically impossible any other way. But the people who promote paying lowest balance first (Dave Ramsey is the big one) freely admit that. Their recommendation isn't based on which way costs less. It is all focused on behavior and motivation. If you have a long list of debts, it can be inspirational to see that list start shrinking as you knock off debts one by one, even if the overall amount owed is still significant. It just feels better to have 4 payments to make each month rather than 7.

For most people, in the grand scheme of things, the difference isn't that big a deal, maybe a few hundred dollars if they are really working a plan and getting debt free within 12-18 months.

[doingitallwrong]

Similar to whatsthecost.com (although in dollars ) but prettier visuals.

In general I think avalanche is almost always going to be the better method. Snowball is really for the psychological boost of paying off *something*, even if it's a small balance, which can then keep you motivated to keep chipping away at the larger balances.

[Eagle]

Paying lowest balance first will always cost more than paying highest rate first. It's mathematically impossible any other way. But the people who promote paying lowest balance first (Dave Ramsey is the big one) freely admit that. Their recommendation isn't based on which way costs less. It is all focused on behavior and motivation. If you have a long list of debts, it can be inspirational to see that list start shrinking as you knock off debts one by one, even if the overall amount owed is still significant. It just feels better to have 4 payments to make each month rather than 7.

For most people, in the grand scheme of things, the difference isn't that big a deal, maybe a few hundred dollars if they are really working a plan and getting debt free within 12-18 months.

It's probably true that if you are paying off your debt in 12-18 months snowball or avalanche don't matter. I do agree that psychologically it seems better to have 4 payments rather than 7.

That said if someone is paying off their loans in say 2, 3, 4 years or more then perhaps the avalanche would be a better option.

[Eagle]

Similar to www.whatsthecost.com (although in dollars ) but prettier visuals.

In general I think avalanche is almost always going to be the better method. Snowball is really for the psychological boost of paying off *something*, even if it's a small balance, which can then keep you motivated to keep chipping away at the larger balances.

Thanks for the site info. That is in pounds?

Yes, I agree snowball is more psychological than anything.

[Kundan Lal Rana]

Avalanche method makes more sense than the debt snowball, but really this strategy may be harder and psychologically overwhelming for some. Debt snowball is only for high income people who meet all repayment requirements on their debts. Personally I use undebt.it

[disneysteve]

That said if someone is paying off their loans in say 2, 3, 4 years or more then perhaps the avalanche would be a better option.

Absolutely. I wasn't promoting the snowball method - just explaining why some folks do.

The reality, however, is that most people could be debt-free in far less time than they think if they would seriously attack the problem, slash their spending to the bare minimum, and aggressively repay the debts. So those folks who are taking 2 or 3 or 4 years to do it could probably do it in 1 or 2 if they really wanted to.

[creditcardfree]

Thanks for the site info. That is in pounds?

Yes, I agree snowball is more psychological than anything.

Whatsthecost site shows up in pounds, but can be changed to dollars on the right side of the site.

[doingitallwrong]

Whatsthecost site shows up in pounds, but can be changed to dollars on the right side of the site.

Oh, thanks, I hadn't noticed that.

[moneysma]

Financially speaking, highest interest first is the smartest move. Unfortunately, we aren't all wired financially. Most of us fall for the psychology of lower number of debts means better.

At the end of the day, I think we sometimes overlook the ultimate goal - to get out of debt. As long as you get out of debt, that is what really matters. Who cares if you spent $100 more in interest by following one method versus the other?

With that said, anyone in debt, should look at both approaches and then decide which one makes sense for them and follow through.

[disneysteve]

Financially speaking, highest interest first is the smartest move. Unfortunately, we aren't all wired financially. Most of us fall for the psychology of lower number of debts means better.

At the end of the day, I think we sometimes overlook the ultimate goal - to get out of debt. As long as you get out of debt, that is what really matters. Who cares if you spent $100 more in interest by following one method versus the other?

With that said, anyone in debt, should look at both approaches and then decide which one makes sense for them and follow through.

I agree with all of this. I would also add that it depends on the specifics of the debt situation too. If you have a long list of debts to attack, cleaning up a few little ones just to get them out of the way is fine. It isn't going to make much difference overall. Also, if you have one big debt and one or two little debts, same thing. Get the little ones out of the way first. That lessens the chances of you being late on a payment and getting hit with a fee or anything else going wrong. Then you can focus 100% on the main debt.

[snafu]

Here on this site people often start out seeking a quick fix for years of poor financial decisions. So many want to use their retirement plan not understanding that taking that route will make their problems worse over the long haul. That's not even considering how they'll pay for basic living expenses as a senior. I think it's important to offer these people who feel their back is against the wall something they can wrap their heads around like pay the smallest balance and 'snowball' to the bigger sums. I wish I could find the words to motivate people to make a few cut backs and temporarily lower their standard of living.