Snowball or avalanche: which payoff order saves more
The maths says avalanche. The psychology often says snowball. A worked example of both.
There are two sensible orders in which to pay off several debts, and people argue about them more than the difference deserves.
The avalanche puts every spare dollar at the highest interest rate first, and pays minimums on the rest. When that debt is gone, the next-highest rate gets the money. This is the cheapest route through, because you are always attacking the balance that costs most to hold.
The snowball ignores rates and goes smallest balance first. Clear the little one, roll its payment into the next-smallest, repeat. It costs more in interest. What it buys is a closed account within the first month or two, and for a lot of people that is the difference between a plan they follow and one they quietly abandon.
Here is a worked example. Three debts: a store card at $1,200 and 24 percent, a credit card at $3,500 and 14 percent, and the tail of a personal loan at $900 and 7 percent. Say you can put $600 a month towards the lot. Avalanche goes store card, credit card, loan. Snowball goes loan, store card, credit card — the $900 is smallest, so it is first, even though it is the cheapest debt you have.
Run the numbers and the avalanche wins by roughly forty dollars in interest over the ten months it takes either way. Forty dollars is real money. It is also, spread across ten months, four dollars a month, and the snowball hands you a paid-off account inside two months.
So the honest answer is that the maths is right and it barely matters. If you have ever started a payoff plan and stalled, use the snowball and forgive yourself the four dollars. If you have the temperament to stare at a 24 percent balance for two months while a small loan sits there untouched, the avalanche is yours, and you get to keep the forty.