When the time comes to start thinking about how to go about paying off loans and you do some Googling to figure out the best way to do it, you’ll likely encounter conflicting advice that may leave you baffled. In this article I’ll explain why targeting loan payments based on their highest interest rate is by far the most financially prudent approach.
What Are the Debt Snowball and Avalanche Methods of Debt Payoff?
If you haven’t already consolidated or refinanced your loans, you’ll be faced with the choice of how to pay off multiple loan accounts.
The “debt snowball” method is paying off your loans with the smallest balance first, regardless of their interest rate compared to your other debts. This bottom-up technique gets its accolades from people touting its motivational effect—the idea is that seeing bigger progress sooner will fuel you with the sense of accomplishment to continually pay your loans off quickly. It has been popularized by the money guru Dave Ramsey, who characterizes it with the image of a snowball tumbling down a hill and building in size as more snow sticks to it, because he believes early, quick wins (i.e., paying individual loan accounts off in full) will build momentum, causing you to pay off your debt more quickly than you would have otherwise.
The “debt avalanche” method, on the other hand, is the diametrically opposed, top-down strategy of putting as much money as possible toward loans with the highest interest rates first, while paying just the minimum on the rest.
Why the Debt Avalanche Method Is a No-Brainer
It may be true that early wins fuel debtors with motivation to pay off loans faster, but knowing that you’re taking the route that will cost the least total money should be sufficient.
I’ve heard proponents of the snowball method explain they prefer it because they’re “not a numbers person” or financial planners say they suggest it to their clients because money is just a very emotional thing.
But debt is a numbers problem! And when your emotions are clearly getting in the way of paying off your debt more quickly, it’s a clear sign you should try to transcend those damaging emotions with some calm, clear reason and sheer will. I see succumbing to the appeal of the snowball method in a similar light as eating bowls of ice cream several times a day even though it’s making you fat and unhealthy; it may feel good in the moment, but in terms of the bigger picture, it’s harmful to your health. And maybe getting rid of those accounts faster will make you want to pay off debt quickly, but that’s like trying to win a race while treading water. Why do something that’s slowing you down?
To illustrate just how ridiculous the snowball method is, consider these analogies.
1. Let’s say you have two leaks in the ceiling and it’s been raining like crazy lately. One has a steady drip, with one pan under it. Another leak is through a larger hole in the ceiling, and there’s a waterfall coming down, with multiple pans under it. Instead of trying to patch up the bigger hole, you decide to tend to the one with the drip, simply because it will mean one less pan.
2. Imagine there are two people shooting a you. One has a machine gun and the other has a BB gun. You decide to focus all your energy on stopping the one with the BB gun, because it will mean one less stream of bullets is coming at you.
I’ve come across several accounts from people saying they were more motivated by using the snowball method, and even research backing that statement up. I don’t doubt that’s the case, but we should use the knowledge of our bias to avoid it, considering that it is clearly less efficient.
A Couple Exceptions
This is barely worth mentioning if you are basing your approach to debt payoff on what will minimize total interest costs, but in some cases, the snowball method wouldn’t hurt (though it wouldn’t actually serve you better, either, unless quick wins cause you to pay your debt off more quickly).
The only way it would result in paying the least overall in interest is if the loans with the smallest balances also happened to have the highest interest rates — simply going by whichever have the highest interest rate (and paying no attention to how many loan accounts you have) is a surefire way to keep your interest costs as low as possible.
If you have multiple loans, two or more of which have the same interest rate, paying the most on whichever one of them has the smallest balance would eliminate that account more quickly. If it makes you feel better about yourself, go for it. But note that it won’t make a measurable difference, unless it influences your behavior for the better.