The Debt Avalanche Method: The Debt Snow Ball Method’s Big Sister

Do you know that feeling when you think that you have it all figured out, but then something comes along and makes you question yourself? That happened me today when I was researching the fine details of the debt snowball method and came across something called the debt avalanche method.

The Problem

I had to make a few large purchases recently and I used two different loans to finance them. I used my credit card and my trusty line of credit that I paid off in 2016 to finance these purchases. As I was making these purchases I was thinking about the payback. I really wanted to get a good idea of how I should tackle this new debt. Should I pay off the higher interest and higher balance credit card first or should I start with the lower interest, lower balance line of credit?

These are the questions that have been on my mind for the last few months. I figured that the best time to figure them out is right now, so that I can adjust my budget to suit.

My initial thought was that I would use the ever trusty debt snowball method to pay off these debts. The plan was to put every extra cent to these two bills and get rid of them as fast as possible. But my next question was, which one should I pay off first? I thought that I could pay of the line of credit because it was a smaller amount with a lower interest rate. But then I would be incurring additional interest charges on the credit card.

I ultimately decided that I would use the popular debt snowball method and push everything to the credit card, just because I did not want to get burned. But in my reading, I realised that this was not the debt snowball method, this was the debt avalanche method! I had never heard of this method before, so it was a bit strange to read about it. Just when I thought that I had learnt everything, the internet threw up a debt payoff conundrum.

Debt Snowball vs Debt Avalanche

The Debt Snowball Method is a method that was popularised by Dave Ramsay of The Wealthy Barber fame. With this method, you focus on paying off the debt with the lowest balance whilst making the minimum payment on all of the other loans.

So, for example:

Credit Card – $10,000 – 22% Interest Rate

Line of Credit – $6,000 – 16% Interest Rate

If I use the debt snowball method, I would strive to pay off the line of credit first and then the credit card. The main benefit of this method is that I could get rid of the line of credit in a few months. But, it could mean that I would be paying more interest on the credit card.

On the other hand, the Debt Avalanche Method which is also known as the Debt Stacking Method, focuses on paying off the debt with the highest interest rate, whilst making minimum payments on all other debt. The focus is not on the figures owed, but rather on the debt with the higher interest rate.

So, in the example above, I would focus on paying off the credit card debt of $10,000 and then work on the line of credit debt of $6,000.

Although the debt avalanche method might take a bit longer to see results in the form of totally clearing either of these debts in the short term, it can save me money in the long term.

I’m leaning towards the debt avalanche method, simply because credit card debt is big, bad and scary. By my calculation, if I use the debt avalanche method I could pay off the credit card by October or November and then clear off the line of credit by March 2018.

I used this Snowball Vs Avalanche Calculator and it showed that the debt avalanche is slightly better because at the end of it all, it results in a lower outlay of funds.

Debt Snowball and Debt Avalanche Links

If you want to read a bit more about the debt snowball and debt avalanche methods, here are a few of the links that I used for my research.

Additional Thoughts

Another scenario came to me as I wrote this post. What would happen if I needed to use either of these loans for another purchase? How would that impact my quest to pay off these debts? My inner wish is that I do not have to touch either of these loans for at least a year. If anything pops up, I want to be able to make the purchase in cash.

My ultimate goal is to make most of my purchases in cash. If I have to make any credit card purchases, I will try to ensure that the cash is readily available to pay it off as soon as I can. I’ve been doing this quite successfully for the last few years and I can attest to the benefits. I always try to keep mental (and excel spreadsheet) notes about how I will pay off the debt.

I’m not quite sure how the debt avalanche method slipped me after all of these years. But it just proves that there is always something new to learn. I’m quite happy to realise that there are still some things about personal finance that I don’t know. And I’m now intrigued by other methods that regular people can use to get rid of debt or save more money.

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