Snowball or avalanche: which is the best way to pay down debt?

The method in which you pay down debt can be the difference of paying thousands of dollars in interest as well as how many years you'll spend paying it all off. So what's the difference between the Snowball and Avalanche methods?

If you were a student during the last decade or so it's likely you were victim to the banks' enticing student packages where you could get an "interest free" overdraft, a "low-rate" credit card and "special rates" on a personal loan. All of which probably came back to bite you when you finished your tertiary education and the real-world interest rates and fees began piling up. You may now feel as though you're forever paying the multiple minimum repayments and not seeing the end in sight.

That was me a few years back before I decided to put my grown up pants on and put a plan in place to pay off my pesky short-term debt as soon as possible while paying as little interest as possible. The following examples are just to give you an idea of how these methods work but the results can vary hugely depending on what debt you have and how much you're willing to allocate to paying off your debt each month.

Avalanche method: Pay off your debts that have the highest interest rates first.

This is my preferred method of paying off debt because it means I pay less interest and as a result I pay off my debt faster.

Snowball method: Pay off your debts that have the lowest balances first.

This method gives you a quick win because you can get the satisfaction of getting rid of one debt and be motivated to move on to the next one. I put an emphasis on quick because the win is temporary. In the end you will pay more interest than you would using the Avalanche method and will spend more time paying off the debt. Overall you'll have paid more out of your pocket.

Obviously, if you increase the amount you allocate to paying off your debt each month the savings will be even better and, more importantly, your debt will disappear sooner!