What is a debt avalanche? In short, the avalanche method of debt reduction is where you pay off your debts in order from highest interest rate to lowest interest rate, no matter what their balances.
Basically, it’s the payment method with the highest interest rate first. The order is based entirely on the interest rates you’re charged.
(Note: another little-known name for the debt avalanche method is “debt stacking”, so you may have heard it called that too. It’s the exact same thing.)
Here’s why you might (or might not) want to use this payoff method to eliminate your debt.
How the debt avalanche method works
A debt avalanche works like this: you make a list of all your debts and put them in order from highest interest rate to lowest interest rate. It doesn’t matter how much you owe on each one.
You do make minimum payments on all of your debts, but you focus hard on paying off the debt with the highest interest rate first by sending extra to it.
Once you’ve paid off your first target debt, you add that debt’s former minimum monthly payment to the minimum monthly payment of next debt in your list. This increases that next debt’s minimum payment size, so you begin sending more to that debt until it too is gone. The method continues on from there until all your debts are repaid.
It’s like you have an avalanche of increasingly larger payments to attack your target debt with over time.
How to set up your debt avalanche
The basic steps are:
- Make a list of your debts
- Organize your debt avalanche by putting your debts in order from highest interest rate to lowest interest rate. If you have two debts with the same interest rates, put the one with the smaller balance first.
- Stop borrowing
- Make all the minimum payments
- Pay extra to the first unpaid debt in your avalanche
- Repeat steps 4 & 5 until all your debts are repaid
You don’t need any special tools for this. You can use a piece of paper, the best debt avalanche app, an Excel spreadsheet, a debt avalanche worksheet, or a debt avalanche calculator to set it up. Use whatever seems easiest to you. If you’d like to get an idea of what it might look like for you right now, use the one below.
Free debt avalanche calculator
To use this debt avalanche calculator, set “Start Payoff with” to Debt with the highest interest rate, enter the desired information, and click Calculate.
Now let’s talk about how a debt avalanche works in more detail.
Here’s a quick example of how to use the debt avalanche method. Suppose you have debts A, B, & C. You ignore the balances and put them in order from highest to lowest interest rate. So you have:
A) $1,000 owed at 18% interest with a $55 minimum payment
B) $1,300 owed at 12% interest with a $60 minimum payment
C) $1,050 owed at 4% interest with a $35 minimum payment
You make monthly payments on all debts, and as a debt is repaid you start sending that minimum payment to the next debt in the list.
In this example you’ll pay off debt A in 1 year and 10 months. B will take you 2 years, and C will take 2 years and 2 months. You’ll be completely out of debt in 2 years and 2 months, but you won’t pay off your first one until a few months before then. You’ll also pay a total of $402.33 in interest.
The process will look like this:
If you pay extra to the first debt in your list, it’ll go faster.
(Note: If you’re doing Dave Ramsey’s debt plan, you will NOT use a debt avalanche. You’ll use the debt snowball method instead.)
What’s the difference between the debt avalanche method and a debt snowball?
Here’s a quick overview of the only difference between the two, technically speaking.
- In the debt snowball, you list all of your debts in order from smallest balance to highest balance, no matter what their interest rates. Then you start attacking the smallest debt with a vengeance.
- In the debt avalanche, you list all of your debts in order from highest interest rate to lowest interest rate, no matter what their balances. High interest debts are at the top of the list, so you could end up tackling massive credit card debt first, for example.
So technically speaking, the ORDER you pay off your debts in is the only difference between the two methods. (Smallest to largest debt, or highest interest to lowest.)
Other than that, they both work exactly the same way.
But in the battle of debt snowball vs debt avalanche there’s more to it than that. Why?
Because the order may change how fast you pay off the first debt (or whether you succeed at all.) It may change your motivation, and it may change how much you pay in interest. More on those things in the next section.
Advantages & disadvantages of the debt avalanche method
There are both advantages and disadvantages to using the avalanche debt payoff strategy. You’ll need to know both yourself and your debt information in order to decide whether the avalanche vs snowball method is best for you.
Advantages of a debt avalanche:
- using it may cost you less in interest (but this depends on your debts & interest rates)
- may be faster overall than the debt snowball IF you can stick with it (but again this depends on your debts & interest rates)
- can be good for someone who does not have consumer debt
- can work for someone who is good at celebrating incremental, spread-out progress
- feels right math-wise (but debt is often not a math problem despite it feeling that way)
And the disadvantages:
- you must be able to stick with it even though progress may feel very slow or small
- requires discipline
- harder to build momentum because it may take you longer to pay off your first debt (depending on your debt balances)
- it’s often not very motivating, so you may be likelier to give up. Giving up is the one thing you can’t do if you want to pay your debts off.
Is using the debt avalanche strategy the best way to get out of debt?
The idea behind the debt avalanche method is that you will pay less interest over time and so getting out of debt will cost you less. Who wouldn’t want that? There’s just one problem with that idea: it may or may not be true.
How much interest you personally end up paying depends on your individual debts, interest rates, balances, and whether or not you stick with it. (Many people give up after a while because they feel like they aren’t making any progress. In that case, a debt avalanche is NOT the best way.)
They way you got into debt could affect things too. If you only borrowed for medical bills, for example, the avalanche may work well for you because you already have the habit of not borrowing for most things.
So again, it completely depends on your exact debt balances, interest rates, and feelings.
Personal finance is personal, and while math does work the same way for everyone, the numbers in the math problem matter. And your motivation and choices going forward matter even more.
How quickly can you get out of debt with the debt avalanche vs. the debt snowball?
How quickly you can get out of debt is going to depend on many factors, chief of which is you.
The only way to find out for sure math-wise is to put your exact debts and your exact payment amounts into a debt calculator and see.
(I highly recommend my own Pay Off Debt app. It makes it easy to do exactly that, because you can switch the order from smallest balance to highest interest rate under the configure snowball section.)
Remember that while paying off the highest interest rate debt first makes the most sense math-wise, debt is rarely about math. It’s about not having enough of an emergency fund, insurance, or patience, or sometimes just not knowing that the “normal” way of monthly payments isn’t the only way.
No matter which method you choose, as long as you stick with it you’ll definitely get out faster than the “normal” way. That way is paying off one debt at a time according to the creditor’s terms, while not taking on new debt. That’s a super slow way to get out of debt – but it’s better than not getting out at all.
And it’s definitely better than immediately going back into debt again once you pay off a debt. Many people do that with cars. They pay off their car loan, and then start thinking about replacing that car with a new one right away. That’s the debt treadmill method, where you never get off. I recommend avoiding that one for sure!
How do you decide whether to use the debt avalanche vs. the debt snowball?
If you’ve struggled with getting out of debt in the past, you should probably take a look at the debt snowball instead.
It’s not critical that you pick the “right” or “best” method. It’s critical that you stop borrowing and don’t give up as you work to repay what you owe already.
- What’s going to help you succeed most?
- Which can you stick with?
- How good are you at seeing incremental progress as success?
- Is math a very large factor?
If you’re worried about interest or how long it will take…
If you’re worried about which method of debt reduction saves you the most money in interest, don’t blindly assume that you’ll pay more interest with the debt avalanche vs. debt snowball. You might or might not. Sometimes you might pay more in interest with the debt avalanche. Sometimes you might pay less. Or it could be about the same either way.
The same thing goes for time. Often I’ve seen it where there’s only a difference of a few months to pay between the two methods.
Second, know that you absolutely will pay more interest if you give up and stay in debt. So use the one you’ll be most likely to stick with! The one that will keep you fired up so you succeed.
That’s likely to be the debt snowball method, because it gives you a psychological boost from paying off debts quickly. It gives you lots of small wins, and that keeps you motivated.
In fact, Kellogg School researchers David Gal and Blakeley B. McShane “found that consumers who pursued the ‘small victories’ strategy were more likely to eliminate their entire debt balance.”
In other words, people are more likely to SUCCEED at becoming debt free when they pay off their smallest debts first. (Wouldn’t you like to see your student loan, credit card debt, car loan, etc gone for good?)
Who is a debt avalanche best for?
The debt avalanche method works best for people who:
- are REALLY good at seeing tiny steps forward as progress, even if they haven’t yet paid off a single debt
- who don’t give up easily even in the face of multiple setbacks
- and who got into debt due to unusual circumstances that they’d done as much as they possibly could to prevent first
OR for people who have already proven to themselves that they will follow their plan for the long haul without borrowing again. Such as:
- People who had great health insurance, a fat emergency fund, and a steady job, but still ended up overwhelmed by medical debt.
- People who have already spent more than a year successfully paying down debt without adding any new debt in the process, for any reason.
In other words, the debt avalanche works best for those who have already proven to themselves that they don’t use debt any longer (for any reason) and are in control of their money and financial life.
It helps a whole lot to be able to see incremental progress as successful in order to do well with a debt avalanche. (For example, seeing paying down $500 of a $10,000 balance as making good progress.)
Who should consider avoiding the debt avalanche method?
Depending on your individual debts, balances, and interest rates, using a debt avalanche could mean spending a long, long time (sometimes years!) working to pay off debt before you pay even a single one off.
If the thought of plugging away at the same exact debt for years gets you down (or makes you not even want to start) the debt avalanche method is probably not for you.
If you got into debt the “usual” way, by using credit cards, taking out student loans, buying cars, or borrowing for emergencies instead of using an emergency fund for emergencies, and you haven’t changed those behaviors for good, it’s probably not for you.
Tough love alert! If you can’t get over the fact that it isn’t logical to pay more interest when using a debt snowball instead, keep in mind that it isn’t logical to pay interest at all. Yet you went ahead and did exactly that when you went into debt.
This suggests you didn’t get into debt logically, so you’re unlikely to succeed at using logic to get out of debt either. You’re probably better off using the debt snowball method instead – at least at first – because it often brings quick wins. It’s a proven way to help people succeed. It can light a fire under you and help keep you motivated as your work your plan.
Either way, run the numbers yourself and do a gut check. Then review your past experiences and actions to see how your gut matches up. Don’t take advice off the internet from people who may never even have been in debt themselves, let alone successfully gotten out and stayed out.
Debt avalanche vs debt snowball: Which method is better?
So which method IS better in the battle of the debt snowball vs avalanche method?
The bottom line is that the best way to get out of debt is the method that you will stick with.
No one knows you and your life better than you, so focus on what’s going to help you succeed.
However, in general most people have a lot more success with the debt snowball method. They see early successes, get fired up, and stay that way for the long haul. So my vote is usually for that as the best method. In fact, we inadvertently used the debt snowball method to get completely out of debt, house and everything. (Here’s our story.)
One exception to this is usually if you’ve acquired your debt all at once (such as getting hit with a slew of medical expenses that were way above and beyond what your insurance covered) and are typically used to living without debt. In that case, it can absolutely make sense to use the debt avalanche, assuming you really do pay less interest with that in your situation.
Another exception is if you’ve got extremely high interest debt like payday loans. If that’s the case, do everything you can to get those nasty little things paid off first, starting with whichever one is easiest for you to get paid off. You want those out of your life as fast as possible.
The point is to choose whichever method works best for you. They will both work if you stick with them, but one will be easier than the other for you.
Deciding which method to use is a matter of knowing yourself and your debts.
No matter which method you choose, get started and stick with it
Take the extra money you can find in your budget (or money you make by selling things you no longer need, doing surveys, petsitting, getting a second job, etc) and send that to the debt you’ve chosen to focus on first. (Because remember, you’re only paying minimum payments to the other debts.)
Unless there is a penalty for doing so, make a payment as soon as you get the money. Have an extra $5 today? Go online and make a $5 principal-only payment toward your chosen debt. Get an extra $20 tomorrow? Do the same thing. Don’t wait until the bill is due or until you have a certain amount “saved up”. Just pay every chance you get. (Just remember to make the regular payment before the due date as well.)
Once your chosen debt is wiped out, choose the next debt in line to focus on. Your debt repayment will speed up over time, because as each debt is paid off, you’ll be able to use the money you were paying toward that debt toward the next debt in line.
So get that snowball rolling! (Or kick your debt avalanche off, if that’s what’s best for you.)
While you’re at it, celebrate each step of the way. Paying off debt is a great feeling!