Weekend Reading – Debt avalanche or debt snowball to kill debt

Weekend Reading – Debt avalanche or debt snowball to kill debt

Hi Folks!

Welcome to a new Weekend Reading edition where I highlight each approach: debt avalanche or debt snowball to kill your debt.

I’ll summarize each approach and what I/we’ve done over the years on that take too…but before that, some recent reads and reminders from my site:

Last weekend, I shared some thoughts about owning lots or a little Big Tech in your portfolio. Owning tech stocks can be/has been good for my returns but supporting big tech also has risks. 

Weekend Reading – Pros and cons of owning Big Tech

Our projected annual dividend income has stabilized in 2024, as expected and planned, since all DRIPs (Dividend Reinvestment Plans) related to that update are now turned off – cash is simply accumulating every month – although I might make a few purchases here and there during the year as well. 

March 2024 Dividend Income Update

Weekend Reading – Debt avalanche or debt snowball to kill debt

Weekend Reading - Debt avalanche or debt snowball to kill debt

Image source: iStock.

OK, is one better over the other?

What do these things even mean? 🙂

Let’s break it down and happy to hear from readers on this subject as well, what they have done. I’ll share what I/we have done in a bit…

Whether you have a mortgage (or had a mortgage), a car loan or other types of debt in your life, we probably agree that for most of us, holding long-term debt can be a wealth killer. This is because with debt you pay other people first.

Luckily, there are a few approaches (whether you realized it or not at the time) to kill debt:

  1. Debt avalanche, or
  2. Debt snowball.

How does the debt avalanche method work?

As the financial jargon references, you get after it from top to bottom – you focus on reducing your debt that costs you the most in terms of the highest interest rate first. While you of course make the mininum payments on all your debt obligations, you would kill debt generally in this order: credit card debt at 20%, then your car loan at 7%, then your mortgage payments at 5%.

The main benefit of the debt avalanche approach is that it should save you money long-term by targeting the most expensive debt first: by focusing on the debt with the highest interest rate, mathematically, you’re tackling your highest interest burdens first.

What is the debt snowball method?

Debt snowball works a bit differently: you start small and roll your way up (like rolling a snowball). You again make your mininum payment obligations but with any extra money, you double-down on your lowest debt to gain momentum. Once the smallest debt is killed off, move on to the next smallest one, rolling your debt snowball until all your debts are paid off. Maybe by the time you’re at the largest debt (mortgage?), all extra income is flowing to that making one heckuva snowball fight against it.

The key benefit I see from this approach is forced behavioural change: gratification by knocking out the smaller debts quickly and positioning your behaviour to tackle the biggest debt problems that lie ahead. 

What did we do: debt avalanche or debt snowball?

Well, firstly, I must admit as a bit of a personal finance nerd I didn’t care what the labels/terms were. 🙂

Just like in a recent post on my site about when to sell your stocks whereby some folks didn’t know there were terms like “equity glide path” to use and follow, I simply figured the debt that caused us the most financial stress and grief was the one to tackle more aggressively over time. For us, that was always the mortgage (when we had one). 

Killing the mortgage beast was our key priority even when mortgage rates were next to nothing. I wrote about that in 2017 in fact:

From that post:

Money is cheap now. It makes sense to kill some mortgage debt.

This is counter to what some folks might be doing – taking on more leverage but that’s not smart. Rates will go up eventually. When they do, we’ll have less debt.

We’ll do this by making our base mortgage payments and making additional mortgage payments where we can – that’s actually one of our financial goals this year while debt is very cheap.

Lowering our principle today while money is cheap will mean less costs to finance at a higher rate in the future, a few years from now.

Should the rate rhetoric continue for the next 4-5 years, and rates never move, we’ll be close to being mortgage free thanks to paying back our mortgage while debt is super cheap. 

What should you do: debt avalanche or debt snowball?

I think it comes down to what motivates you…

Some people are highly motivated by small wins. Other folks are motivated by major goals. Some individuals still like a mixture of big and small goals to accomplish. It all can work!

Ultimately, the best debt payoff strategy (just like investing) is the approach you can stick to that will help you realize your objectives. Take a good look at what makes you tick, define a plan, and adjust a bit along your debt reduction way. That’s it. 🙂

Which approach did you use to kill debt? Did you even care what it was called? Are you still tackling debt and if so, how at times of higher interest rates?

Other Weekend Reading…

Related to my recent article about when to sell your stocks:

Hanging up on half of my Bell stock on the Sunday Reads.

Back to the catchy capital gains news / headline (subscription) from The Globe and Mail:

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

18 Responses to "Weekend Reading – Debt avalanche or debt snowball to kill debt"

  1. Mark there is a subtle but consistent tone in all your posts that I notice and truly appreciate. You have a balanced approach and realize the incredible wealth and quality of living we enjoy in Canada compared to much of the world. You measure a healthy amount of empathy and compassion into your thoughts as well as recognize our need to pay our share for both the benefit of our fellow residents but also caretakers of the environment. Please continue to be an outlier in the Canadian online personal finance realm that tries to be responsible within a capitalism based society that can often be selfish and short sighted.

    Reply
    1. Very kind, Chris. I’m happy to read my balanced approach to things comes through in the writing. It’s how I feel, how I invest and largely how I try and live my life.

      We’ve downsized our condo to be caretakers of the planet. We reuse, we recycle, we repurpose where we can. I am in the process of buying a PHEV to hold for the next 10-15 years that should be less of a burden on our planet while recognizing that oil and gas stocks are here to stay for the coming 40-50 years. I do what I can to improve my behaviour and if others learn a bit from my site including what not to do – or adjust for their own purposes for the better – then even better. 🙂

      I continue to follow your pics and such on X/Twitter. Stay well!
      Mark

      Reply
  2. To me the way to pay off debt is paying off the highest interest one first that’s the most bang for your buck(follow the math). Add me to the “avalanche” group.

    However, I can agree having some small wins and dropping a few creditors off the list would be a good emotional boost.

    The thing that drives me crazy is when you see someone in debt and they don’t help themselves and get terrible advice (normally from a bank selling a product) and start the investing for their future while still carrying credit card debt. Why have a GIC from their bank making a few precent in a TFSA while still paying the minimum balance on their credit card paying 19.9% interest on the balance? Try to explain to someone that they can’t worry about their future retirement if they have “hair on fire debt” to pay off. In my experience unless they are in a place mentally to listen and really look at their whole financial picture it is a waste of time to even try.

    Reply
    1. Ya, I’ve always been an avalanche guy…chip away at the largest burden. I haven’t had any credit card debt since I was maybe 23 (for a month?) so I don’t know what that is. 🙂 Luckily!

      Makes very little point to have any money inside any investment account when you owe tens of thousands of dollars in high interest costs to someone else but that’s just me.

      “In my experience unless they are in a place mentally to listen and really look at their whole financial picture it is a waste of time to even try.” Yes, those conversations can be a HUGE challenge and I’m at the point in my life where I don’t offer unsolicited advice to save my mental energy. Ha.

      Mark

      Reply
  3. Mark, I like your take on taxes. In my view, they’re a necessary requirement. We know there are some people who take advantage of the benefits provided from tax revenues, but the vast majority of us don’t. Even though I always owe CRA at the end of the year (by design), I do actually enjoy filing my taxes!

    Reply
  4. I used the debt snowball, although I didn’t know the terms at the time. It worked well for me but I was also super motivated to get out of debt prison!

    Reply
  5. We just killed off some line of credit debt with this year’s tax refund. We still have our investment HELOC and our mortgage. The mortgage comes up for renewal (2.37%) in June of 2025. We just accelerated to bi-weekly, and increased our payment to $1,000. When my wife’s car payment is done in October we will start putting that towards the mortgage as well. When we renew (hoping for ~4.5%) we have a plan to pay off the mortgage before our planned retirement (about 3 years).

    That will still leave us with the investment line. We will continue to write off the interest while collecting our dividends and then reduce / eliminate that when we relocate for retirement.

    Reply
    1. Great stuff. We did bi-weekly accelerated payments on our mortgage as well when the borrowing rates were low with the odd lump sum payment.

      Three years will hopefully go quickly for you to slay the mortgage dragon!

      Mark

      Reply
  6. Hello there , when we bought our house in 1989 interest rates were 16.75 % . We took a 25 year amortization and a 1 year closed . Intrest rates starred to fall so we went to 6 month open but with the same PIT payment . 2 years later the taxes were paid directly to the city so I keep payments the same and paid the city . It took us 12 years to pay off our morgage and never increased our payments other than paying taxes directly . But could you imagine a 16.75 % morgage . FYI my car payment was at 21.75 % . The good old days .

    Reply
    1. No, I can’t imagine 16%+ mortgage debt but at least the tradeoff back then was housing was affordable but my goodness that was a high interest rate!

      Are you still debt-free JP?
      Mark

      Reply
  7. “Debt snowball works a bit differently: you start small and roll your way up (like rolling a snowball). You again make your mininum payment obligations but with any extra money, you double-down on your lowest interest rate debt to gain momentum.”

    I think this should read that you double down on your smallest debt to gain momentum. Isn’t the goal to eliminate the smallest debt first to make you feel like you have accomplished something? Your lowest interest rate would probably be your mortgage.

    Thanks for the great blogs you post.

    Reply
    1. Thanks very much, Jan. I enjoy your comments.

      Well, I don’t like Dave Ramsey but he considers debt snowball as the following and I’ve updated that statement to clarify – to your point. 🙂

      Step 1: List your debts from smallest to largest (regardless of interest rate).
      Step 2: Make minimum payments on all your debts except the smallest debt….since you had to make min. payments on all your debt.
      Step 3: Throw as much extra money as you can on your smallest debt until it’s gone….then tackle the next…

      https://www.ramseysolutions.com/debt/how-the-debt-snowball-method-works

      Thanks for that.
      Mark

      Reply
  8. Hey Mark – I’ve never used those terms but I guess I took the “avalanche” approach – tackling the highest interest debt first. In our “high-spend” years (with 3 kids), we did have to take on more debt (in addition to our mortgage). The approach I took was to consolidate the higher-interest debt loans by getting a secured line of credit (that I was able to get at prime) and using that to pay them off. I also used every opportunity I could to get the mortgage paid off (bi-weekly accelerated payments, lump sum payments when possible, etc). BTW, can you believe my first mortgage in the early 90s was at 13%!! That’s not a typo – 13%! One other thing – whenever I came into some money (eg. bonuses, etc), I would use a balanced approach – some for debt reduction and some for investment. I was never one to borrow for additional investment (even though I know you could deduct the interest) – I just wasn’t wired that way. I will say though – being debt-free before entering retirement was a MUST for me. Fortunately, I was able to achieve that – and (at least for me) was the right thing to reduce any stress/uncertainty. My 2 cents. 😉

    Reply
    1. Thanks MikeyP and super smart: “…whenever I came into some money (eg. bonuses, etc), I would use a balanced approach – some for debt reduction and some for investment.” I’m baised, we did the same with our bonuses too. 🙂

      We own our home/condo now since the start of 2024 and now saving up some cash for semi-retirement. 🙂 Keep you and others posted!
      Mark

      Reply

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