If you’re not careful, your debts can easily pile up. Before you know it, you may owe a cumulative amount that is impossible to clear in one go.
To help you deal with that, we took a look at two popular ways of debt-clearing: the snowball and the avalanche strategy.
To help illustrate how these strategies work, let's look at this example. Let's say that you owe different banks the following:
| Bank | Total Amount | Monthly Minimum | Interest Rate |
| A | P13,500 | P1,150 | 6% |
| B | P12,000 | P1,000 | 4% |
| C | P6,000 | P600 | P3.5% |
You are able to set aside P3,000 every month for debt payment. Let us assume that you don’t incur any new debt.
The snowball strategy
This method involves paying off your debts one by one, starting with the smallest. You set aside as much money as you can from your monthly income, and first use it to pay the minimum for all debts.
What’s left is called your “snowball amount” and you put it in the debt with the smallest balance. Once that’s paid off, you put this amount in the next-smallest debt. You’ll notice that as you clear debts, the amount gets bigger, hence the name.
The advantage of the snowball strategy is more psychological than mathematical. By giving you small wins, you get a sense that you’re getting things done.
So, in our example, remember that you have P3,000 to pay off your debts. This is how you would use that money.
On Month 1, you pay P1,150 to Bank A, P1,000 to Bank B, and P600 to Bank C, leaving you with P250. Using the snowball strategy, you focus on Bank C first because this is the smallest debt. In effect, you'd pay P850 to Bank C on Month 1. Doing this consistently every month will allow you to clear this debt by Month 8.
| Bank | Total Amount | Monthly Minimum | Amount You'll Pay | Balance |
| A | P13,500 | P1,150 | P1,150 | P12,350 |
| B | P12,000 | P1,000 | P1,000 | P11,000 |
| C | P6,000 | P600 | P850 | P5,150 |
With your debt to Bank C gone, you’ll have a monthly snowball amount of P850. This will let you clear your debt with Bank B by Month 10. And by Month 11, you’ll be free of debt.
Remember that this example doesn’t factor in the debt increases because of interest. In fact, even Dave Ramsey, an American businessman and snowball advocate, admits that this isn’t the most efficient method. It does, however, give people momentum in paying their debts because it sets achievable milestones.
The avalanche strategy
Also known as debt stacking, the avalanche strategy involves prioritizing the fastest-growing debt. Each month, you pay the minimum for each debt then put the rest of your money in the one with the highest interest rate.
While it might not feel as rewarding as the snowball method, the avalanche strategy helps you save on interest payments.
Let’s go back to our previous example.
Monthly, you would pay the minimum for all three debts, then focus on Bank A with the remaining money until it’s paid off. Then, you move on to Bank B and eventually Bank C.
| Bank | Total Amount | Monthly Minimum | Amount You'll Pay | Balance |
| A | P13,500 | P1,150 | P1,350 | P12,150 |
| B | P12,000 | P1,000 | P1,000 | P11,000 |
| C | P6,000 | P600 | P650 | P5,400 |
For both snowball and avalanche strategies, you end up debt-free in roughly the same amount of time. However, what about interest?
Using the snowball method, you pay P758 in interest. Meanwhile, using the avalanche method, you pay P731, a difference of around 3.69%. It may not seem like much but these small percentages can add up.
Combining the strategies
You don’t have to choose just one method. Look at what would work best for your specific situation, including the terms of your debt. Credit cards, for example, apply interest monthly, while car loans and home loans tend to implement it annually.
If your credit card bill is P10,000 with a 3.5% monthly interest rate but your car loan is P600,000 with a 4% annual interest rate and your home loan is P1 million with a 6% annual interest rate, then it wouldn’t be efficient to pay only the minimum for your credit card just to get started with your bigger loans.
That is because your credit card’s 3.5% monthly rate translates to an annual interest rate of 42%.
So, you may want to apply the avalanche strategy and clear your credit card debt first. Then, you could shift to the snowball strategy and pay off your car before focusing on your home loan.
