What is the difference between the Debt Snowball and Debt Avalanche methods of paying off debt?


Answer: The Debt Snowball and Debt Avalanche are two widely known methods of paying off debt. One is a mathematically faster way to pay off the debt; whereas, the alternative is slightly slower but is more psychologically motivating. This motivation is what helps the person reach their debt pay off goals. The following set of debts will be used as the basis for explaining each method:

Debt A has a balance of $10,000 at a 4% interest rate. 
Debt B has a balance of $5,000 at a 10% interest rate.
Debt C has a balance of $8,000 at a 24% interest rate. 

The Debt Avalanche is typically the fastest and most cost effective way to pay off debt. The person makes minimum payments on all their debts and any extra goes towards the account with highest interest rate (Debt C in example above). Once that first balance is paid off, the person takes the payments from that and puts it all towards the second highest interest rate (Debt B). Repeat until all debts are paid.

The Debt Snowball is a method popularized by a personal finance expert, Dave Ramsey, in Step 2 of his 7 Baby Steps to building wealth. This method uses psychology by paying off the smallest balance first (Debt B above). The theory is that the feeling of quickly paying off a debt balance provides the motivation to stick with the program. Similar to the Debt Avalanche, the person takes the payments from Debt B and puts it towards the next smallest balance (Debt C). Repeat until all debts are paid.