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Debt Reduction: Snowballing versus Stacking

If you have debt, it’s time to tackle it. When it comes to methods of debt reduction, snowballing versus stacking, which is better?

I’m going to tell you right away; monetarily speaking, stacking wins. But nothing is ever that simple. Both methods have their merits and their drawbacks. We’ll take a detailed look at each so you can decide what method will work best for you.

Lots Of Debt

Forty million of us have student loan debt to the tune of $1.2 trillion dollars. Seven million of us are in default on those loans. Credit card debt isn’t much better. We have $712 billion in credit card debt outstanding, an average of $15,355 per household. Your debt is an emergency, but you can pay it off.

Snowballing Method

Snowballing means listing all of your debts in order of smallest to highest dollar amount and then using any extra money to pay off the smallest balance while only paying the minimums on the others. If you have a $5,000 student loan at 4% interest, a credit card balance of $6,000 with 17% interest, and a $10,000 car loan with 9% interest, you pay off the student loan first, followed by the credit card and finally the car.

Once the smallest debt is paid, you move to the next smallest using the same strategy and include the amount you were paying on the first debt into your monthly payment on the next. You continue to do this until all of the debts are paid, the largest being last one to go.

Stacking Method

To use the stacking method, you list your debts in order of highest to lowest interest rate, regardless of the dollar amount of the debt. You throw as much money as you can at the debt with the highest rate of interest. If you have the same debts we listed above, they would be ordered this way; the $6,000 credit card, the $10,000 car loan, and finally the $5,000 student loan.

Once each debt is paid, you move down to the next highest interest rate one, again, using the money you were paying towards the last debt, and do the same. So on and so on until all the debts are paid.

Snowballing Pros

A big pro for this method is the psychological win it provides you. It’s so satisfying to cross a debt off your list. That boost can also give you momentum; you killed that one, you can kill all of these debts! This kind of boost is no small thing.

Snowballing also makes your life just a little bit easier. Each debt paid off is one less payment you have to remember to make, one less check to mail or electronic payment to schedule.

This method is also likely to be faster. Paying off the smallest debt first might mean you can get rid of it in just a couple of months.

Snowballing Cons

It’s a big one; it costs more money in the end using the snowballing method. Interest is powerful, and when it’s working against you, it’s working hard. It also takes discipline to use this method. You free up money more quickly because you’re killing off those smaller debts faster than with the stacking method. What you’re supposed to do with that money is put it towards the next debt on the list.

But you didn’t get into debt because you have steel clad discipline. You might see those extra dollars in your checking account and think it’s more money to spend. No! Bad! Put it towards the next debt.

Stacking Pros

As I’ve written, the stacking method makes the most sense financially. You will pay less in interest if you choose this method. We pay 34% of the money we make over our lifetime to interest. Minimizing that as much as possible is a big cornerstone of being financially healthy.

Stacking Cons

Stacking’s biggest con is snowballing’s biggest pro. It can take awhile for pay off debts with the stacking method, and it can be discouraging. You don’t get the quick gratification of paying something off relatively fast.

Snowballing Versus Stacking, Head To Head

Let’s do a real numbers example to show the difference between the two methods:

Our smallest debt is $1000 with an interest rate of 19%. We pay $100 a month. By the time the debt is paid off, we will have paid $97.28 in interest.

Now let’s use the same numbers but this time, $1000 is not our biggest debt, but it does have the highest interest rate at the same 19%. Because we’re throwing everything at this one, we up our payment to $200 a month. At the end of this debt, we will have paid $50.33 in interest.

That’s a big difference; you will be paying nearly twice as much interest if you use the snowballing method versus the stacking method.

But We’re Humans, Not Computers

So if you have debt, which method should you choose to pay it off? Clearly the stacking method is superior. But that sort of black and white question doesn’t take emotion into account. The psychological victory of banging out a debt is a big deal.

The method that is best is the method that will work for you. The method that you will stick to. You don’t need our approval or Dave Ramsey’s approval. And choosing one method to get started doesn’t mean you can’t change methods down the road. If your debt seems overwhelming, start snowballing and bask in the satisfaction of killing off a debt or two.

After a few months of this, switch over to stacking for a little while and see if you can keep the same momentum. Chart out how much interest you will be saving in the long run. There is satisfaction in seeing that too. If you start to stall out, go back to snowballing.

There Is Help

Whatever method you choose, be sure that you are not adding to your debt. Bailing water out of a boat with a leak isn’t going to keep it from sinking. Now that there is room on those credit cards, leave it there. You must stop using them. You must make a budget and stick to it. Mint can help you with budgeting.

Let LMM take you to money school. We have designed courses that will teach you to grow your income, cut your expenses, budget your money, and destroy your debt. Come and be a part of our Community where you can ask questions and get advice without judgement. Living with constant money worries is terrible for your mental and physical health, your relationships, and your future. No one has to live that way. There is so much help out there. Just ask for it.

Show Notes

Ready for Zero: An on-line resource to help you tackle your debts.

LMM Community: Join the money revolution

Featured Image Photo Credit: “snowball!” by John Lodder on Flickr

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