Debt avalanche and snowball
The avalanche and the snowball are two ways to pay off several debts. Both pay the minimum on everything; the avalanche sends extra money to the highest interest rate first, the snowball to the smallest balance first.
🌍 In the real world
The avalanche costs the least interest, because the most expensive debt goes first. The snowball can cost more, but clearing small balances quickly gives early wins that help some people keep going. The one you stick with beats the one you abandon.
Guides often treat debt at 10% interest or more, like most credit cards, as high-interest and worth paying off before investing beyond an employer match, since paying it off saves a known rate while investment returns are never certain. Debt around 4% to 5% is often called moderate.
Example
Debts: a $500 store card at 18%, a $4,000 credit card at 24% and a $6,000 car loan at 7%. The snowball pays off the $500 store card first; the avalanche starts with the 24% credit card.
🎮 In Journey Shares
Your margin loan is the game's costly debt: it charges more than savings pay. Step 3 of the money plan is to pay it off before growing savings to $5,000. →
🧭 How to use it
Pay off your margin loan before adding more to risky positions. Every day it's open you pay interest, whether your stocks go up or down.
If you have a short open, remember its borrow fee too: it's another cost that runs every day until you buy the shares back.
🎮 Learn Debt avalanche and snowball the fun way
Try it in a live 3D city with play money: trade shares in real public figures, get margin-called, pay your taxes and rob a bot or two. Free, and nothing real is at stake.
❓ Common questions
Which is better, avalanche or snowball?
The avalanche costs less interest. The snowball gives quicker wins and some studies find people are more likely to stick with it. The best one is the one you'll finish.
Should I pay off my mortgage early?
Most guides don't put a low-rate mortgage in the high-interest group. Whether to pay it off early depends on its rate, your other goals and how much you value being debt-free.
📜 Where it came from
🧩 Quick check
Which term is this?
“____ is using borrowed money to increase the size of an investment, which magnifies both gains and losses.”
🔗 Related terms
- Interest rate: An interest rate is the price of borrowing money, stated as a percentage of the loan per year.
- Compound interest: Compound interest is interest earned on both your original money and the interest it has already earned, so savings grow faster over time.
- Credit score: A credit score is a number, usually from 300 to 850 in the US, that estimates how likely a person is to repay debts.
- Margin: Buying on margin means borrowing money from your broker to buy more stock than your cash alone allows, using your investments as collateral.
- Leverage: Leverage is using borrowed money to increase the size of an investment, which magnifies both gains and losses.
Categories: Personal finance
Practise with $10,000 in play money
Free. No real money involved.