Debt Snowball vs. Debt Avalanche: Which Method Will Truly Rescue Your Finances?

Picture this: It’s the first of the month, and your kitchen table looks like a battlefield. 

The enemies? A scattered array of bills, their due dates circled in angry red ink. Credit card statements, personal loans, car payments—each demands your attention and money. 

Your palms start to sweat as you wonder, “How on earth am I going to tackle all of this?”

If this scene hits a little too close to home, you’re not alone. Millions of Australians wake up every day to the daunting reality of multiple debts. But here’s the good news: you don’t need a magic wand or a winning lottery ticket to turn things around. What you do need is a solid strategy.

Enter the dynamic duo of DIY debt-busting: the Debt Snowball and the Debt Avalanche methods. These two strategies often go head-to-head in the personal finance ring, each with its own fan base. But which one will be your financial heavyweight champion? That’s exactly what we’re here to uncover.

In this deep dive, we’ll pit the Debt Snowball against the Debt Avalanche, comparing their strengths, weaknesses, and knockout power. By the final round, you’ll have a clear understanding of which method might just be your ticket to financial freedom. So, strap in and get ready—it’s time to rumble with your debts!

Understanding the Debt Snowball Method

Let’s start with the crowd-pleaser: the Debt Snowball method. This strategy was popularised by personal finance guru Dave Ramsey, and it’s all about momentum and quick wins. Think of it as the “tick the box” approach to debt repayment.

Here’s how it works:

1. List all your debts from smallest balance to largest, regardless of interest rates.
2. Make minimum payments on all debts except the smallest.
3. Throw every extra dollar you can at that smallest debt.
4. Once the smallest debt is paid off, take all the money you were putting towards that debt and redirect it to the next smallest. Hence, the “snowball.”
5. Repeat until all debts are paid.

The magic of the Debt Snowball lies in its psychological edge. By targeting the smallest debt first, you’re likely to taste victory sooner rather than later. And let’s be honest, who doesn’t love crossing something off their to-do list? This early win can provide a much-needed morale boost, fueling your motivation to keep going.

So, who might be the poster child for the Debt Snowball method?

Meet Sarah, a 28-year-old graphic designer. She’s got a handful of debts: a small personal loan from her uni days, a couple of credit cards, and a car loan. The amounts vary, but none are astronomical. Sarah’s been feeling overwhelmed, unsure where to start. She needs those small victories to believe that becoming debt-free is possible. For Sarah, the Debt Snowball could be just the confidence-builder she needs.

Diving into the Debt Avalanche Method

Now, let’s shift gears and look at the Debt Avalanche method. If the Snowball is all about emotion and momentum, the Avalanche is its cold, calculating cousin. This method is the darling of maths enthusiasts and long-term planners.

The Debt Avalanche follows these steps:

1. List all your debts from the highest interest rate to the lowest, regardless of the balance.
2. Make minimum payments on all debts.
3. Put any extra money towards the debt with the highest interest rate.
4. Once the highest-interest debt is paid off, move on to the next highest, and so on.
5. Repeat until you’re debt-free.

The Avalanche method is all about efficiency. By targeting high-interest debt first, you minimise the total interest you’ll pay over time. It’s like taking a machete to the dense jungle of compound interest—every extra dollar you throw at that high-interest debt is hacking away at future interest charges.

But make no mistake, the Avalanche method requires patience and a solid grasp of delayed gratification. You might be chipping away at a large, high-interest debt for months before you get the satisfaction of crossing it off your list.

So, who’s the ideal candidate for the Avalanche approach?

Meet Michael, a 35-year-old accountant. He’s got a mortgage, a substantial credit card balance (thanks to a recent home renovation), and a personal loan. Michael’s analytical mind loves spreadsheets, and the idea of paying a single extra dollar in interest makes him cringe. He’s less concerned with quick wins and more focused on the end game: paying the least amount of money possible to become debt-free. For Michael, the Debt Avalanche is music to his ears.

Crunching the Numbers: A Tale of Two Debts

Now that we’ve met our contenders, let’s see them in action. Nothing beats a good old-fashioned number crunch to really understand the difference between these two methods.

Let’s create a hypothetical debt scenario:

1. Credit Card A: $3,000 balance at 22% APR
2. Personal Loan: $5,000 balance at 12% APR
3. Credit Card B: $1,000 balance at 18% APR
4. Car Loan: $8,000 balance at 6% APR

Assume our hypothetical debtor, let’s call her Emma, has $500 extra each month to put towards debt repayment after making all the minimum payments. How would the Snowball and Avalanche methods play out?

Debt Snowball in Action:

Emma would tackle the debts in this order: Credit Card B, Credit Card A, Personal Loan, Car Loan. Let’s fast forward to see the results:

• Time to debt-free: Approximately 3 years and 4 months
• Total interest paid: About $3,800

Debt Avalanche in Action:

Emma would target the debts in this order: Credit Card A, Credit Card B, Personal Loan, Car Loan. The results?

• Time to debt-free: Approximately 3 years and 2 months
• Total interest paid: About $3,500

In this scenario, the Avalanche method wins by a nose, shaving off two months and saving about $300 in interest. But hold on—before we declare a winner, there’s more to this story than just the numbers.

Beyond the Numbers: The Emotional Aspect of Debt Repayment

While our number-crunching exercise might make the Debt Avalanche look like the clear winner, we’re missing a crucial piece of the puzzle: the human element. Debt repayment isn’t just a mathematical equation; it’s a psychological journey, often fraught with emotions like guilt, shame, and anxiety.

This is where the Debt Snowball method really flexes its muscles. By focusing on quick wins, the Snowball method taps into the power of positive reinforcement. Each debt you knock out, no matter how small, is like a little victory dance for your brain. These wins trigger the release of dopamine, the feel-good neurotransmitter that motivates us to repeat rewarding behaviours.

Think about it: how often have you started a new habit—a diet, a workout routine, learning a new skill—and given up because you didn’t see results quickly enough? The Debt Snowball method fights this tendency by serving up victories on a silver platter, early and often.

On the flip side, the Debt Avalanche method appeals to our logical side. It’s for those who can look at a spreadsheet showing thousands of dollars in interest savings and feel genuinely fired up. The delayed gratification doesn’t bother them because they’re playing the long game. Every minimum payment on a lower-interest debt is a strategic move, allowing them to funnel more cash toward interest-gobbling balances.

So, which method is right for you? It boils down to knowing yourself. Are you the type who needs regular rewards to stay on track? The Snowball might be your jam. Or are you energised by efficiency and long-term planning? Then, you might find your rhythm with the Avalanche.

Potential Pitfalls of Each Method

Now, let’s play devil’s advocate for a moment. Neither the Snowball nor the Avalanche method is perfect, and it’s crucial to understand their potential drawbacks.

Snowball Method Pitfalls:

1. Higher Interest Paid: As we saw in our calculations, you might end up paying more in interest over time. If you have a high-interest debt with a large balance, the Snowball method could cost you.
2. Loss of Momentum: What happens when you’ve cleared all the small debts and you’re left staring at a mountain of debt? Some folks might find their motivation waning when the quick wins dry up.

Avalanche Method Pitfalls:

1. Delayed Gratification: It could be months or even years before you completely pay off your first debt. That’s a long time to wait for a win, and some people might throw in the towel.
2. Interest Rate Complexity: If most of your debts have similar interest rates, the advantages of the Avalanche method diminish. You might be splitting hairs trying to prioritise debts with only fractional differences in rates.

Hybrid Approaches: Getting the Best of Both Worlds

But who says you have to choose just one method? Personal finance isn’t always black and white, and there’s room for a grey area—let’s call it the Debt Snowfall method.

The Snowfall method is a hybrid approach that borrows from both the Snowball and Avalanche strategies. Here’s a taste of how it might work:

1. Start with the Snowball method to build momentum, paying off one or two small debts.
2. Then, switch to the Avalanche method to tackle your high-interest debts.
3. If motivation starts to flag, knock out another small debt for a quick morale boost.

The key is flexibility. Your debt repayment strategy should be a living, breathing thing that adapts to your changing financial situation and emotional needs.

Maybe you land a bonus at work and can wipe out a high-interest debt in one fell swoop—awesome, temporary Avalanche activated! Or perhaps you’re going through a stressful time and need the psychological win of eliminating a small nagging debt—Snowball to the rescue!

Additional Strategies to Supercharge Your Debt Repayment

Regardless of whether you’re Team Snowball, Team Avalanche, or somewhere in between, there are additional strategies you can employ to turbocharge your debt repayment:

1. Increase Your Income: Consider a side hustle, freelance gig, or asking for overtime at work. Every extra dollar you earn can be a soldier in your debt-busting army.
2. Slash Your Expenses: Take a hard look at your spending. Can you cut back on subscriptions, dine out less, or negotiate better rates on your bills? Redirect those savings straight to your debts.
3. Negotiate with Creditors: You might be surprised at how willing creditors are to work with you. A simple phone call could result in a lower interest rate, especially if you have a history of on-time payments.
4. Automate Your Payments: Set up automatic transfers to ensure you’re consistently chipping away at your debts. This set-it-and-forget-it approach can help you stay on track even when life gets hectic.

When DIY Might Not Be Enough

While the Snowball and Avalanche methods are powerful tools, there are times when a do-it-yourself approach might not cut it. If you’re feeling overwhelmed, struggling to make minimum payments, or if your debts are spiralling out of control, it might be time to call in the cavalry.

Professional options like debt consolidation, credit counselling, or even consulting a financial advisor can provide the expertise and support you need to get back on track. There’s no shame in asking for help—in fact, it’s often the smartest move you can make.

Conclusion: Your Debt-Free Future Awaits

As we’ve journeyed through the snowy peaks of the Debt Snowball and navigated the rushing waters of the Debt Avalanche, one thing is clear: there’s no one-size-fits-all solution to debt repayment. The “best” method is the one that you’ll stick with until you cross that debt-free finish line.

The Debt Snowball offers the allure of quick wins and motivational boosts, perfect for those who need regular doses of encouragement. The Debt Avalanche, with its laser focus on interest rates, appeals to the efficiency-minded, promising optimal savings for those who can delay gratification.

But remember, whether you choose to start an avalanche or roll a snowball, the most important thing is that you start. Your debt-free future is not a matter of if but when—and that “when” depends on your actions today.

So, look at your debts, be honest about your personality and motivations, and choose your weapon. Your financial freedom battle plan awaits!

Get Money Fit – Book a Call Today!

Ready to declare war on your debts but feeling unsure about your battle strategy? You don’t have to go it alone. At OneBudget, we’re not just financial advisors; we’re your allies in the fight for financial freedom.

Our team of experts will work with you to understand your unique situation, help you choose between the Snowball, Avalanche, or a customised hybrid approach, and provide the support and accountability you need to stay the course.

Don’t let another day pass under the shadow of debt. Contact OneBudget today for a free, no-obligation consultation. Together, we’ll map out your journey to a debt-free life and equip you with the tools you need to win.

Your brighter, debt-free future is just a phone call or click away. Reach out to us now—because financial freedom isn’t just a dream; it’s a destination, and we’re here to help you get there.

Call us on 1300 027 565, or book a call now!