According to the Federal Reserve’s latest report, the average small business loan amount is approximately $663,000. With such significant debt, two of the most popular methods for paying it off are the debt avalanche and the debt snowball. Each strategy offers unique advantages depending on your financial situation and personal motivations.

The Debt Avalanche Method Explained

The debt avalanche method is one of the most popular debt repayment strategies. It focuses on paying off debts with the highest interest rates first. This approach is ideal for those who want to minimize the interest they pay over time, making it a financially efficient way to tackle debt. How It Works With the debt avalanche method, you list all your debts and organize them from the highest to the lowest interest rate. You then focus on paying the minimum required payments on all your debts except for the one with the highest interest rate. You allocate any extra money you can afford each month for this highest-interest debt.

Once the debt with the highest interest rate is paid off, you redirect the funds you used for that debt to the next highest-interest debt while maintaining the minimum payments on the rest. This process continues until all your debts are cleared. The main advantage is that you reduce the total interest paid over time by tackling the costliest debts.

For example, if you have a credit card debt with a 21.99% interest rate and a student loan at 5%, it’s clear that paying off the credit card first will save you significantly more money in the long run.

Why It Saves You Money

The key benefit of the debt avalanche method is its potential to save you substantial money on interest. Targeting high-interest debts first minimizes the interest you accumulate, which can significantly shorten your debt repayment period.

For instance, in one scenario comparing both debt repayment methods, individuals using the debt avalanche method paid $309 less in interest over the repayment period than those using the snowball method, showing how much faster debt can be cleared when interest rates are prioritized.

Advantages of Debt Avalanche

• Lower overall interest: By focusing on high-interest debts, you ultimately reduce the total amount of interest paid.
• Faster debt elimination: Although it may not feel fast initially, paying off high- interest loans accelerates repayment.
• Structured approach: This method provides a clear, logical path toward becoming debt-free based on financial efficiency.

The Debt Snowball Method Explained

The debt snowball method is a popular strategy for paying off debts, starting from the smallest balance to the largest, regardless of interest rates. This method is known for its psychological advantages, as it helps people gain quick wins and maintain motivation.

How It Works

The snowball method begins by listing all your debts in order of balance, from the smallest to the largest. You continue making minimum payments on all your debts, but any extra funds available for repayment are applied to the smallest debt. Once that debt is paid off, the freed-up money is “snowballed” into the next smallest debt, creating momentum as each debt gets cleared.

For example, if you have three debts: $500, $3,000, and $10,000, this method advises paying off the $500 balance first, regardless of its interest rate. Once that debt is cleared, you roll that payment amount into the next most considerable debt, and so on.

The Power of Small Wins

The critical psychological benefit of the debt snowball method is the motivation you get from small victories. Paying off the smallest debts quickly gives you a sense of accomplishment that encourages you to keep going.

A study from Northwestern University’s Kellogg School of Management found that people who focus on small wins, such as using the snowball method, are more likely to pay off their entire debt.

Drawbacks of the Snowball Method

While the snowball method is great for motivation, it may cost you more interest over time than methods like the debt avalanche. Since you’re focusing on balance rather than interest rates, more enormous debts with higher interest can accumulate more costs while you’re paying off smaller debts.

For example, paying off a $500 debt at 5% interest while leaving a $10,000 debt at 24% interest can lead to significant extra costs. If minimizing interest is your priority, the snowball method may not be the best fit.

Which Debt Repayment Method is Best for You?

Whether you use the debt avalanche or the debt snowball method depends on your financial situation and psychological needs. Both approaches have pros and cons, and choosing the right one requires evaluating your motivations, long-term financial goals, and debt management methods.

1. Prioritize Financial Savings with the Debt Avalanche Method
   The debt avalanche method is ideal for those who want to minimize the interest they pay over time. By focusing on paying off debts with the highest interest rates first, you save money in the long run, even though the initial progress might feel slower.
   
   This method works best if you are disciplined and can stay motivated without needing frequent wins. If you have high-interest credit cards or personal loans, the debt avalanche can help you cut down on overall costs.
2. Stay Motivated with the Debt Snowball Method
   In contrast, the debt snowball method appeals to those who need quick psychological victories to stay on track. The technique emphasizes paying off the smallest balances first, which can motivate you to continue tackling more significant debts. This approach is constructive if you struggle to stick to long-term financial plans.
   
   However, while this method helps maintain momentum, it’s worth noting that it may cost you more in interest over time since you’re not prioritizing the debts with the highest interest rates. If staying motivated and maintaining a sense of accomplishment is essential to you, this method can be more effective in the long run, even if it’s not the cheapest.
3. Consider a Hybrid Approach
   For some, a hybrid approach that combines both methods can offer the best of both worlds. Start with the debt snowball method to build motivation by knocking out smaller debts, then switch to the debt avalanche method for more significant, high-interest debts. This lets you stay motivated while tackling the more expensive debts that will save you the most money in the long run.
   
   By combining the psychological benefits of the snowball method with the financial savings of the avalanche method, you create a flexible and personalized repayment plan. Many financial advisors recommend this strategy to balance short-term wins with long-term savings.

Which One Fits Your Financial Personality?

• Use the Avalanche Method if You are motivated by numbers, disciplined, and focused on reducing interest costs. This method makes the most sense if you are trying to minimize the overall cost of your debt.
• Use the Snowball Method if You need regular motivation and get discouraged easily by large debts. This method works best if you seek psychological wins that keep you on track, even if it means paying more interest.
• Consider a Hybrid Approach to balance motivation and financial savings. This can provide early momentum and a long-term strategy for effectively reducing costs.

Choosing the proper debt repayment method depends on your financial priorities and how you stay motivated. The debt avalanche saves you the most money in interest, while the debt snowball keeps you motivated with quick wins.

A hybrid method could be the perfect solution for balancing both approaches. Ready to tackle your debt head-on? Contact Better Accounting today to develop a personalized debt repayment strategy for your financial needs and goals.