Debt Repayment Methods

Embarking on a debt repayment journey can be daunting. Whether you’re clearing student loan debt, medical debt, credit card debt, personal loans or overdrafts, or even money you owe friends or family, finding a repayment approach that works for you is key. Luckily, people are more open than ever about their journey to becoming debt-free, with many opting to share their progress on social media as part of the #debtfreecommunity. If you’re keen to get debt-free yourself, this guide explains everything you need to know about popular debt repayment strategies: The Debt Avalanche Method and the Debt Snowball Method. Ready to dial up your debt ditching motivation? Let’s get into it.

What is the Debt Avalanche Method?

The Debt Avalanche Method is a debt repayment strategy that prioritizes paying off balances with the highest interest rate first, before moving onto the debt with the next highest, and so on. When approaching your debt repayment journey, you first meet your minimum payment obligations on all debts, before directing any surplus repayments to the debt with the highest interest rate. The aim of this strategy is to reduce the amount of interest you pay overall, by prioritizing paying off the debt that’s costing you the most before the debt that costs you the least.

What is the Debt Snowball Method?

The Debt Snowball Method is a debt repayment strategy that prioritizes paying off the smallest debt first, before moving onto the next smallest balance, and so on. As with the Debt Avalanche Method, your first priority is meeting the minimum repayment obligations across all debts to avoid penalties and marks against your credit score. All surplus repayments are then directed to the smallest debt first, with the aim of making progress as quickly as possible. The aim of this debt repayment strategy is to build momentum and motivation. By paying off the smallest debt first, you get the feeling of satisfaction and accomplishment sooner, thus motivating you to continue on your debt repayment journey.

Pros, cons and comparisons

Pros of Debt Avalanche

• You’ll likely pay less overall. Generally, paying off your highest interest debts first will reduce the overall amount you pay back. That’s because you’re reducing the most expensive balances first, rather than letting them compound while you pay off smaller, cheaper debts.
• Mathematically it’s the most effective way to be debt-free soonest. Rationally, the Debt Avalanche makes the most sense. Interest adds to the amount you repay on your debt-free journey, so focusing on paying as little interest as possible can help you get there sooner.
• You make a commitment to clearing your debt in the most effective way possible. Taking on a Debt Avalanche approach to getting debt-free is a bold commitment to your future self. It requires strong discipline and consistency, which will pay off if you stick to it.

Cons of Debt Avalanche

• Behaviorally, it can be harder. While it makes the most mathematical sense, personal finance, especially where debt is concerned, is far from rational. We have to work with our own unique motivational profile, and find something we’ll actually stick to, not just what works on paper.
• You may feel like you’re making slower progress. The Debt Avalanche Method may mean you’re tackling a bigger debt first, which means you’re further from reaching a clear milestone. This can mean your perceived progress towards your end goal of being debt-free feels like an uphill battle.
• Motivation can taper off in the absence of quick wins. Paying off debt is a lot easier said than done. While you might think you’ll still be consistently motivated to make repayments using the Avalanche method, problems can arise when that motivation wears off. If you revert back to just making the minimum repayments because you’ve lost steam with your bigger goal, you may take even longer to pay off your debts.

Pros of Debt Snowball

• It can be more motivating. Starting with smaller debts can mean you’re hitting milestones much faster. Depending on how small your debts are, you might be able to close a whole debt down within a few weeks. This gives you a taste of your end goal and keeps you motivated to keep going.
• It builds quick wins. The psychology around the Debt Snowball method is all about quick wins, or sub-goals that sit underneath your main goal of being debt-free. These quick wins help you generate momentum and keep you engaged with the habit of paying off your debt — and even more importantly, not going further into debt.
• It fosters a sense of perceived progress. While mathematically, any payment to any debt is equal in value, motivation can come from our perceived level of progress. Paying $600 off of a $6,000 debt might feel like a drop in the ocean, whereas paying $600 off of a $1,000 debt can make you feel like you’re making more progress. If that feeling of perceived progress keeps you on track to continue paying off your debt, it’s a winner — even if it is only in our heads!
• It can improve your financial wellbeing. An important part of financial well being is feeling like we’re able to control our own circumstances and outcomes. Being in debt can rob us of this feeling. Using the Debt Snowball method to feel like we’re making progress quickly can boost our sense of control and therefore improve our overall wellbeing.

Cons of Debt Snowball

• You’ll pay more in interest overall. Interest on debts compounds over time. That means that as you accrue interest on your balance, future interest calculations are effectively adding interest to that interest. The longer you leave debts with high interest rates to compound, the more you’ll pay in interest overall.
• It can take longer to become debt-free. Due to the fact you may pay more interest over the course of your debt-free journey, it can take you longer to reach total debt freedom.

Debt Avalanche vs. Debt Snowball

Debt Avalanche	Debt Snowball
Aim to pay off the debt with the highest interest rate first	Aim to pay off the smallest debt first, and then move onto the next smallest debt
Still requires you to pay the minimum repayments on all other debts	Still requires you to pay the minimum repayments on all other debts
Can save you interest in the long run	Can make it easier to build momentum and motivation
Can get you to debt freedom faster if you have high interest debt	Can help with consistency and follow through that keeps you going to that all-important zero balance
Makes mathematical and rational sense	Builds up perceived progress quickly

The hybrid method: Snowball then Avalanche

The brain bit: The Debt Repayment mindset

The premise of debt repayment strategies like the Debt Avalanche Method and the Debt Snowball method is to break down a large task into smaller, more achievable milestones. This is particularly true for the Debt Snowball method that actually overrides what makes the most mathematical sense in favor of something that supports the behavioral aspect of pursuing debt freedom.

The role of self-efficacy

In much of the research about debt repayment strategies, the concept of “sub-goals” is discussed. These are the micro-milestones within a debt-free journey, like closing down one credit card or paying back a couple of much smaller debts. This thinking comes from the concept of self-efficacy from social-cognitive theory. The idea is that setting yourself up to achieve small sub-goals underneath one ultimate goal (e.g. becoming debt-free) fosters a sense of belief that you can achieve the bigger goal. That’s self-efficacy.

It’s these psychological principles that give particular merit to the Debt Snowball method. So much of personal finance speaks solely to the mathematical and the rational. But personal finance is as much about emotions, behaviors and motivation as it is about numbers and percentages.

However, proving that personal finance truly is personal, other studies have found that the use of sub-goals actually detracts from the broader goal.

Yikes. This brain stuff is complex!

When sub-goals don’t work

The idea here is that when we break down our bigger goals into sub-goals (like focusing on smaller debts first), we actually focus so much on the smaller goals that the bigger goal feels more removed from what we’re doing. We effectively “use up” all our motivation on the smaller goals, leaving nothing left for the big push on the harder parts.

Ultimately, it all depends on your own personal motivational style, and your own debt spread. What motivates one person to pay off three debts of $1,000, $5,000 and $540 might be very different to what motivates someone to pay off seven small debts of under $2,000 each, and that again may be different from someone paying off $50,000 of student loans in one single debt. One study even discovered that the higher the number of small debts, the lower the motivational boost we experience from paying off each one. As such, focusing on the total debt balance going down may be more motivating.

Explore the habits, behaviors and circumstances that led to the accumulation of debt in the first place. Take steps to address any personal changes that could help you reduce your need to go back into debt in the future.

Hedonic debt vs. utilitarian debt

Some studies have explored whether different types of debts are better suited to different types of repayment strategies. There is some evidence that shows our motivation to repay debt is different based on whether the benefit of the associated spending has already been realized or is still pending, and whether the debt is associated with “hedonic” spending (lifestyle, wants, travel, etc.) or utilitarian, needs-based debt.

Research has suggested that hedonic debts with a benefit that has already been experienced are better suited to the Debt Snowball method, as we are more motivated to clear those debts quickly. That’s because non-essential debt can create a sense of shame or self-blame in borrowers wanting to be debt-free. In theory, paying back a debt that carries a degree of shame or personal responsibility could also help boost self-efficacy, since we are taking control of our circumstances by paying it back and squashing that shame.

Utilitarian debts may have been more of an essential undertaking for the borrower, for example student loans, medical debt, or consumer debt due to redundancy or sickness. These types of debts may be slightly better suited to the Debt Avalanche Method, given that behavioral control was less of a factor in the original accumulation of the debt.

Building motivation: Charts and challenges

Okay, so we know motivation is key to successful pursuits of debt freedom. But even when our debt repayment strategy is optimised for maximum motivation, we can still find our tank runs dry when the going gets tough. So how do we maximize that juicy motivation that’s going to help us progress with our goals?

• Gamification of your debt repayment 🕹️

We’re all just big kids inside, right?! That’s why gamifying your debt repayment can be a game changer for your motivation. Try building in your own milestones (whether they relate to your repayment strategy choice or not) and reward yourself in different ways for achieving them. You could even race yourself to achieve them by a certain date, or get a group of friends together to hold each other accountable and race to the milestone.

• Visualize your progress 👀

Visual representation of debt repayment progress has become very popular online — and for good reason. Printing out your own debt repayment charts and coloring in a square every time you pay off a certain amount of debt can be incredibly motivating. Plus, you can use whatever denominations you like to allow yourself to feel like you’re making big strides even with small repayment chunks.

The Goal Gradient Effect

The Goal Gradient Effect was coined by Clark Hull in 1932. It states that as people get closer to a reward, they speed up their behavior to get to their goal faster. So, when you’re closer to becoming debt-free, you’re more likely to put in the work to get there faster.

When it comes to repaying debt, we need to strike the balance between building up enough self-efficacy to get us started — with the help of sub-goals and mini milestones — and then get close enough to leverage the power of the Goal Gradient Effect to help us speed up for the big finish.

Our earlier idea of a hybrid Snowball-Avalanche approach to debt repayment speaks to this method of sustaining motivation. Beginning with a Snowball approach to tick off some quick wins and build momentum gets you to a certain point. Then, when you’re close enough to debt freedom that you’re ready to smash it down (thanks to the Goal Gradient Effect), you can switch to an Avalanche approach, get rid of those higher interest debts first, and focus on the end-goal of being debt-free, rather than on smaller chunks.

Who suits which debt repayment method best?

Debt Avalanche	Debt Snowball
Bigger debts	Smaller debts, especially if you have several
High levels of discipline	Struggle with consistency
Analytical mindset	Love quick wins

How to get started with the Debt Avalanche Method or Debt Snowball Method

Step 1: List out all your debts. This is your first step to debt freedom — get ‘em all down on paper.

Step 2: Find out the interest rate on each debt. Yep, log in to your online banking, find that credit card statement.

Step 3: Rank your debts from smallest to largest, and then from highest interest rate to lowest interest rate. This helps you visualize the two methods in the context of your own numbers.

Step 4: Calculate how much you can afford to put towards debt each month, remembering that you’ll still need to make any mandatory minimum payments, regardless of which repayment strategy you use. It can help to start small here and work up to larger repayments. This sets you up for success rather than failure, and allows you to adjust to living below your meals.

Step 5: Spend some time with both repayment methods and decide which is best suited to you. Here are some questions to ask yourself when choosing between Debt Avalanche and Debt Snowball:

The Debt Avalanche Method and Debt Snowball Method 🤝 PocketSmith

PocketSmith is a great place to track and manage your debt repayments, whichever method you’re using. PocketSmith is the personal finance software for all walks of life, and that means you can customize it to suit you. You can track debt repayments by connecting credit card balances to PocketSmith Bank Feeds, or by listing them as a liability in your Net Worth dashboard. You can then track repayments with a Transfer Budget as you smash down that balance — Snowball or Avalanche style!

Nail it, don’t fail it: Tips to pay off your debt faster

We love nailing it, and we hate failing it. Here are our top tips on smashing your debt faster, whatever your strategy.

• Save at the same time. Yes, it’s tempting to send any spare money to debt repayments. But we really want to be closing that debt book forever. Saving an emergency fund at the same time as paying off your debt means you’ve got real money to fall back on if you need it, without having to go back into debt.
• Focus on behavior, not just the numbers. Explore the habits, behaviors and circumstances that led to the accumulation of debt in the first place. Take steps to address any personal changes that could help you reduce your need to go back into debt in the future.
• Get your mindset right. Mindset is important, especially when it comes to big goals. You have to believe you can be debt-free in order to keep going. It can help to have a motivational self-care ritual, or a positive mantra to keep you focused.
• Avoid dipping back into the debt or credit facility. Be strict with yourself about using debt while you’re paying it off, especially for non-essentials. It can be tempting to treat yourself when you’ve made a bit of progress, but make sure it’s using real cash, and not adding to your debt balance.
• Measure your progress visually. Progress charts (or maybe even your PocketSmith account) can help you visualize your progress to your goal. Check in with your visuals regularly to stay motivated.
• Reward yourself along the way. Celebrate your wins — in a financially savvy way, of course. It’s important to recognize when you’ve hit a new milestone on your debt-free journey.
• Be realistic, don’t set yourself up to fail. Don’t overcommit yourself when paying off debt. Promising you’ll pay off $1,000 each month when you can’t really afford to can lead to goal burnout.

The PocketSmith verdict: 4.5/5

We love debt repayment strategies that understand the behavioral aspect of personal finance — and these do exactly that. If we had to choose, we’d say we’re team Snowball. But actually, we’re team “what works for you”. Whether you Snowball, Avalanche, Hybrid or something else, we’re giving you big snaps for pursuing your debt-free journey.

If you’re struggling with debt, reach out for help.

Debt repayment strategies like Debt Avalanche and Debt Snowball are helpful when you’re mathematically able to pay off your debt and are looking for a strategy to help you do so. However, if your debts are more than you can manage, or you’re only able to afford to make the minimum repayments on each debt, you may benefit from speaking to a financial counselor. A financial counselor may be able to help you negotiate more achievable repayment terms with your creditors, and get you the breathing room you need to make progress.