Introduction: Snowball vs. Avalanche methods

Jennifer Barrett
A free video tutorial from Jennifer Barrett
Acorns Chief Education Officer
4.4 instructor rating • 1 course • 26,017 students

Learn more from the full course

Acorns' Guide to Personal Finance

5 Steps to Building Wealth: Budget Better, Pay Off Debt Faster, Save and Earn More Money and Invest Wisely

46:33 of on-demand video • Updated January 2018

  • How to calculate your net worth.
  • How to start a successful side hustle.
  • How to set goals—and build a budget that will help you reach them.
  • How to ask effectively for a raise or a better job offer.
  • How to pay off debt faster—and pay less in interest.
  • All the basics of investing in stocks and bonds.
  • How to cut your expenses without feeling the pinch.
  • How to build a low-maintenance portfolio that will help you build wealth.
  • How to save more money (101 ways!).
English In this section, we'll cover student loans, credit card debt and mortgages. You'll also learn what goes into your credit score... what's a good score to have, and how having one can literally save you thousands of dollars. And we'll go over some simple steps you can take to improve your credit score. Let's start with some ways to pay off debt faster. There are two basic strategies: the snowball and the avalanche method. This one is good... if you have multiple balances and some are much smaller than others. So, to get started... List all of your loans according to the balance owed, without considering interest rates. Your goal is to make minimum payments on all your balances, while funneling any extra cash to the lowest balance. Once you've got that paid off, the snowball effect begins. Money you've put toward the first balance shifts to the second-lowest balance, and when you paid off that balance, you apply the money from the first two to the next lowest balance and so on and so on. Research shows that small wins, like quickly knocking out those lower balances, can increase your motivation to keep paying down your debt. It can also simplify your finances. On the other hand, from a pure numbers standpoint, the snowball method isn't quite as efficient as... the avalanche method, which we'll get into next, because you could be paying more over time by not hacking away at that highest interest debt first. So let's talk about the avalanche method. This plan is perfect if you want to save as much as possible, and you don't need the positive reinforcement that comes from knocking out smaller debts to stay on track. So, list the balances from the highest interest rate to the lowest. Your goal is to make minimum payments on all of them while funneling any extra cash to the debt with the highest interest rate. Once you've paid that off, extra money shifts to the one with the second highest interest rate, and so on and so on. By paying off the highest interest balances first, you save yourself more money in the long run. And it helps you get out of debt faster. Just know that if your highest rate debt happens to be your biggest balance, you may go a long time without that boost that comes with paying one debt off completely. Whatever method you choose, there are also ways to get your interest rates down altogether, so that you're paying less overall. And there are three main ways to do that...