Debt Solutions: Snowball vs. Avalanche

By Ben Strother, PhD, BFG Financial Advisor

Although the word sometimes has a negative connotation, not all debt is created equal. To better understand debt, it’s important to identify its source.  

Debt used for major investments with the potential to grow in value or generate income can be a good type of debt when the terms and repayment plan are carefully considered.

An example of this would be a mortgage, as homes are assets that typically appreciate over time. Business loans used to finance a business investment with the potential to generate returns that exceed the interest paid on the loan are often considered a strategic type of debt. Unfortunately, this type of debt is much less common than shorter-term consumer debt.

Debt used to fund purchases for small consumer goods and rapidly depreciating assets can cause significant harm to your financial health. This consumer debt often includes depreciating assets like cars or credit cards, used to purchase items that lose value over time. 

Sometimes, these debts mount from unforeseen and unplanned expenses, exceeding saved emergency funds. As the interest payments increase, people see less of their hard-earned income. 

Taking on such debt commits you to bankroll the cost of life now, essentially borrowing money from future earnings. Often, this becomes a spiral that leads to maxing out credit, feelings of burden or entrapment under such debts, and lowered levels of financial satisfaction, freedom, and empowerment.  

For those ready to take on their debt, here are two strategies that can help you find financial peace again.

Debt Snowball Method 

The debt snowball method focuses first on your smallest debts while making minimum payments on your other loans. As each debt is paid off, cash flow is freed up, which can be applied to remaining larger balances. 

Payments on these small debts gain momentum—like a “snowball” growing as it rolls—offering notable wins along the way.

The downside is that the debt snowball approach is not a mathematically optimal approach, as higher-interest debts are left accruing interest for a longer time. Focusing on smaller debts first may cost more money in the long run, but for some, the motivation outweighs the slightly higher total interest paid. 

Debt Avalanche Method

For those who would rather see long-term savings, the debt avalanche method might be the way to go.
The debt avalanche method focuses on paying debts with the highest interest rates first, reducing the total amount paid in interest over time. 

Once the highest-interest debt is paid off, that payment is rolled over to the next highest-interest debt. This creates a cascading “avalanche” effect as you systematically work through your debts. 

While the avalanche method saves more money in the long run, it can feel slower as individual debts take longer to pay off. This delay can discourage those motivated by checking debts off the list. However, the substantial long-term savings on interest charges through the avalanche strategy can encourage others to stick to the plan.

Both the snowball and avalanche approaches have merit and can improve your financial health—which one you choose depends on you. 

A financial advisor at Benson Financial Group will work with you to understand your goals and unique financial situation to help determine the best strategy for you.