Debt Snowball vs. Debt Avalanche

What are the debt snowball and debt avalanche methods?

With the ever-increasing cost of living in Ontario, there’s no shame in recognizing that you’ve accumulated debt. Even if you got into debt by spending hard on that first credit card you got in exchange for a hat in college (we’ve all been there), that’s still no reason to beat yourself up. Quite simply, you’re not alone: between the realities of life right now and the culture of debt we have in Canada, it’d be surprising (and even a risk to your credit score) if you never took on any debt.

If you need more proof that you’re not alone, in late 2022, Statistics Canada found that the average Canadian household owed $1.83 in debt for every dollar of disposable income.

At Integrity Tree Financial, we know you make the best money decisions you can, based on the information and resources you have at the time.

Our goal in this article is to reduce the overwhelming and harmful self-talk that comes with debt and share education to get you out of it – all while creating healthy money habits for life. (For personalized advice, book a free, no-obligation consultation).

What’s the best way to pay off debt?

Emergency Savings

First of all, avoid getting into more debt. If you have no savings for when the car breaks down or to cover a few months’ expenses in case of a layoff, start there first. Pay the minimums on your debt until you have emergency savings and a budget that realistically accounts for your cash flow needs. We recommend setting up automatic withdrawals from your biweekly paycheques into your emergency savings, so you don’t even see the money leave your account.

Once you’ve met your emergency savings goal, you can divert the automatic payments you’re already used to leaving each paycheque into paying down your debt–without having to worry about falling back into it in case of emergency.

Consider consolidation

The next step if you have debts in multiple places (e.g. credit cards, loans, lines of credit) is to consider a lower-interest consolidation loan or consolidating your higher interest debts into your mortgage. We recommend that you speak to a financial advisor to decide if debt consolidation is an option for you.

Debt Snowball vs. Debt Avalanche

If you have your emergency bases covered and you’ve ruled out debt consolidation, the two most popular methods for paying off debt that’s in more than one place are the debt snowball and the debt avalanche methods. Each method has its pros and cons.

First, whichever way you go, you’ll want to start by writing down all your debts and the interest rates that go with each. You’ll also want to know exactly how much income you bring in after tax each month (hopefully, you did this when building your emergency savings). Accuracy, awareness and tracking are keys to success with both the debt snowball and debt avalanche methods.

So, with accurate information in mind, you can make an informed choice about the debt snowball vs. debt avalanche techniques.

Debt Snowball vs. Debt Avalanche

The Debt Snowball Method
The debt snowball method works like this:

  1. List your debts from smallest to largest.
  2. Focus on paying down the smallest debt while covering the minimums on all others.
  3. Once the smallest debt is paid off, celebrate!
  4. Immediately follow the same method to pay off the next smallest debt.
  5. Continue until all debts are paid off.
  6. Celebrate big time! You can now apply the money you put towards paying off your debt towards investments, savings, etc.

Benefits of the Debt Snowball Method

Paying your smallest debt off first gives you the quickest win. This method can be highly motivating and means you have your debt spread out across fewer places as soon as possible, which makes tracking easy.

Pitfalls of the Debt Snowball Method

The main disadvantage of the debt snowball method arises when your smaller debts have lower interest rates than your bigger debts.

You’ll end up paying more interest fees over time by waiting to pay off high-interest debts. With interest rates near 20% on most credit cards, waiting to pay off a big credit card debt could mean a difference of years in debt repayments and thousands of dollars in interest.

The Debt Avalanche Method
The debt avalanche method works this way:

  1. List your debts from highest interest rate to lowest.
  2. Focus on paying down the debt with the highest interest first while covering just the minimums on the others.
  3. Once the debt with the highest interest rate is paid off, celebrate!
  4. Immediately follow the same method to pay off the debt with the next highest interest rate.
  5. Continue until all debts are paid off.
  6. Congratulate yourself! Now you can divert the money you’d used for debt repayments to savings and investments.

Benefits of the Debt Avalanche Method

When you concentrate on paying down debts with high interest rates, you’ll pay your total debt off faster and save yourself the greatest possible amount of money.

Pitfalls of the Debt Avalanche Method

The highest-interest debt could also be your biggest debt. If that’s the case, the time it takes to celebrate your first debt paid off can be extensive, even taking years, which is often discouraging. It makes you less enthusiastic about paying down your debt because your immediate goal feels so far off, making you vulnerable to faltering on your repayment plan.

Is the debt snowball or the debt avalanche method better?

There are a few “correct” answers to this question, depending on your situation. We recommend making both initial lists (smallest to largest debt and highest to lowest interest rate). Then, consider the following scenarios.

Situation #1: Your smallest debt is ALSO the debt with the highest interest rate

If this is your situation, take advantage of it! Pay down that debt first since you get the best of both worlds, then continue paying off your debt using the debt avalanche method for the most significant savings and quickest results.

Situation #2: You’re building good money habits for the first time OR you need quick wins to stay motivated

The debt snowball method is a good option when you need to change your behaviour around money or need frequent rewards to keep you going with any habit. After you get that first win/habit reset by paying off your smallest debt, consider your situation again. Often, this is an ideal time to switch to the debt avalanche method for the best overall savings.

Situation #3: Your highest-interest debt is ALSO the one with the biggest principal

As discussed in the pitfalls of the debt avalanche method, when your highest-interest debt also happens to be your biggest debt, the time it takes to pay it down can weaken your motivation, with the immediate goal being so far off. If this is the case, it may be worth starting with the debt snowball method (smallest debt) to benefit from the motivation of one quick win. Once you’ve paid off the first debt, you can consider switching to the debt avalanche method.

Situation #4: You’re highly loss averse

If you feel angry or about to cry when you think of how much money and time you’d lose using the snowball method, go with the debt avalanche. Choosing the technique aligned with your values and strong emotions is your best bet for success!

The debt snowball vs. debt avalanche: which method is right for me?

If you’re still not sure which method to use or have other factors to consider, we strongly encourage you to book a free consultation. (Those other factors can include whether you have investments or a mortgage or if you don’t have enough cash to cover your monthly expenses). We’re passionate about the financial well-being of all Ontarians, no matter the phase of life of finance they’re starting from. It’ll be our honour to support you on your journey to getting out of debt.

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