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What is the Debt Snowball Method?
If you’re following Dave Ramsey or you’ve been researching how to get out of debt then you’ve most likely come across the snowball method for debt.
If you’re struggling with debt the debt snowball method can definitely be your path to debt freedom if you follow it correctly.
No matter how much debt you’ve gotten yourself into, the snowball method could be an effective way out of it. Next, you’ll discover everything you need to know about the debt snowball method and why it’s so popular!
What is the debt snowball method?
First, let’s go over what is a debt snowball?
When you roll a snowball down a snowy hill, with each roll it gradually starts to get bigger. The more it rolls, the more momentum it develops. By the time it reaches the bottom, it’s now a large boulder rather than the small ball it started out as.
You still with me here?
The debt snowball method works very much in the same way. You start off small, then over time you gain momentum and you end up crushing your largest debt by the time you reach the end.
How does the debt snowball work?
Using the debt snowball method is really easy. You simply pay off your smaller debts first, leaving the larger ones until last. You don’t pay attention to the interest rates of the debts (more on this later). Instead, you look at the overall amount due, listing the debts from smallest to largest.
You’ll then focus all of your attention on clearing the smallest debt first (this will give you the quick win needed to keep going). You do this by making just the minimum repayments on all of your debts EXCEPT the smallest one. Throw as much money at the smaller debt as you can each month until it’s cleared.
Once that smallest debt has been paid off, it leaves you with more available cash to start paying off the second smallest debt. As each debt gets paid off, it leaves you with more available cash to throw at the larger debts.
Keep using this method until all of your debts have been cleared. Let’s break it down even further and give you an example.
DEBT SNOWBALL STEPS BROKEN DOWN
1. List your debts from the smallest balance to the largest balance regardless of the interest rate. Don’t be concerned with interest rates, unless two debts have a similar payoff balance. In that case, list the one with the higher interest rate first.
2. Make minimum payments on all your debts except the smallest. Attack that smallest debt by paying as much on it as you possibly can. Once you pay one debt off, take the money you were paying on that one and add it to the minimum payment of the next debt. As the snowball rolls over, it picks up more snow. Get it?
3. Every time you pay off a debt, cross the debt off. You will start to feel how close you’re getting to becoming debt-free!
THE DEBT SNOWBALL IN ACTION
To give you the best idea of how it works, let’s look at a quick example:
Maria has built up the following debts over the years:
| DEBT | BALANCE | MIN PAYMENT |
| CREDIT CARD #1 | $300 | $20 |
| CREDIT CARD #2 | $2000 | $75 |
| CAR LOAN | $6000 | $225 |
| STUDENT LOAN | $15,000 | $300 |
To use the snowball method, she will continue to make minimum repayments on the student loan, the car, and credit card #2.
She’ll then throw every spare dollar she has each month at the first credit card bill. As of right now, she is paying $620 in minimum payments towards debt each month.
After creating a household budget she manages to free up an additional $130 in her budget each month to put towards her first debt. This has her first debt paid off in just about two months!
| DEBT | BALANCE | MIN PAYMENT | SNOWBALL PAYMENT |
| CREDIT CARD #1 | $300 | $20 | $150 ($20 + $130 XTRA) |
| CREDIT CARD #2 | $2000 | $75 | $75 |
| CARLOAN | $6000 | $225 | $225 |
| STUDENT LOAN | $15,000 | $300 | $300 |
TIP: If you don’t know where to find extra money to pay off your debt check out: How to Pay off Debt When You Have No Money.
She then focuses her attention on the second credit card, paying all of the money she would have had to pay on the first one towards the second one. Once that one was paid off she took the same amount of money and added it to the minimum payment of the next account and so on until all of her debts were paid off.
| DEBT | BALANCE | MIN PAYMENT | SNOWBALL PAYMENT |
| CREDIT CARD #2 | $2000 | $75 | $225 ($75 + $150 XTRA) |
| CARLOAN | $6000 | $225 | $225 |
| STUDENT LOAN | $15,000 | $300 | $300 |
As you can see, the snowball debt method is very simple to follow and allows you to see progress along the way so that you stay motivated.
Is the Debt Snowball Effective?
The main reason the debt snowball method works so well is that it enables you to see consistent results with quick wins. You can see the debt going down, which in turn boosts your motivation to continue.
When you’re trying to pay off a larger debt first, it can take months to start seeing a major difference. This can leave you feeling like you aren’t really getting anywhere, draining your motivation to continue.
Once you see that first debt wiped off, it gives you a “high” you won’t forget in a hurry. This pushes you on to work to pay off your next debt, keeping the high feeling going.
TIPS ON Mastering the Snowball Debt Method
Before you start, I wanted to go over some tips on how best to master this method. In order for it to work there are some do’s and don’ts.
MAKE SURE YOUR DEBTS ARE ORGANIZED
This has to be the first step before you even start to plan your debt snowball. You’re going to find it pretty tough to use the snowball method effectively if you don’t organize your debts. You need to know exactly how many debts you have and how much they total.
From there, you can work out your smallest debt and begin the snowball effect. This is one of the steps many people struggle with. It can be daunting and let’s face it, depressing, writing down everything you owe, and actually seeing it there in front of you. However, by doing so, you’re actually taking control over your finances, rather than letting them control you.
Plus, you’ll soon start to feel much better when you put the snowball method into effect and you see those debts coming down.
Avoid getting into further debt
When you’re saving all of your money to pay towards your debts, it can be tempting to continue using your credit cards for the things you want and need. However, by continuing to use your lines of credit, you’re only getting yourself into further debt.
In order for the snowball method to work, you need to be focused solely on getting the debts down. So, avoid getting into further debt no matter how tempting it might be to spend on your card “just this once”.
Focus on one debt at a time
OK, so this may sound obvious, but it can be really tempting to try and pay off two or three debts using the snowball method. Surely if you were to pay off half of the money you save onto one debt and half onto another, that’s going to eliminate two debts quicker than just one? Well, it will get them down, but it won’t be quicker.
It’s important to focus solely on one debt at a time. You’ll get there much quicker that way than you would be trying to focus on 2-3 debts.
CREATE A HOUSEHOLD BUDGET
If you want to make the snowball method really work, it’s important to set a household budget. This lets you see exactly how much you can spend on things such as groceries and essentials and this is also where you will find the extra money to put toward your snowball!
TIP: Grab my FREE BUDGET PRINTABLES at the end of this article!
While you could budget for entertainment too, the best way to tackle the snowball method is to really cut back on luxuries. It’s tough to do but cutting back on eating out and going to the movies, for example, is going to free up a lot of money to put towards your debts. The more money you can throw at your debt, the faster you’ll be free of it. Then, you’ll have lots of money to spend on the luxuries you desire (paying cash of course).
So, create a household budget and stick to it. Just remember to keep your eye on the bigger goal and that once you pay off your debt you will free up so much money in your monthly budget to put towards the future and towards fun!
The Pros and Cons of Using the Debt Snowball Method
Now that you know what the debt snowball method is and why it’s effective, let’s look at some of the pros and cons.
While it’s touted as the most effective way to get yourself out of debt, like everything, there are still a few downsides you need to be aware of. By comparing the pros and cons below, you’ll be able to make a much better decision about whether the snowball method is right for you.
The pros
Let’s start with the pros of snowballing your debt:
FASTER RESULTS
The first benefit is that you’ll start to see results really quickly. This is KEY to why this method works.
Obviously, you’ll want to get out of debt as quickly as possible. So, when you start seeing fast results, it shows you that you could be debt-free much sooner than you thought you would be. If you’re looking for the fastest way out of debt, this is definitely a method to consider.
Psychological benefits
Another pro of this method is the fact it makes you feel good. As you blast your way through your debts, you’ll start to feel much happier, more in control and a lot less stressed.
You’ll find it easy to stick to
When you’re in a lot of debt, it’s easy to give up. However, with the snowball method, your motivation is consistently high as you see results pretty quickly. So, if you’re looking for a debt reduction method you can stick to, the snowball method is the perfect option.
These are some pretty great benefits, but before you decide whether or not it’s right for you, let’s take a look at some of the cons of the snowball debt method.
The cons
Although the snowball method definitely has a lot of advantages, it’s not without its potential drawbacks. They include:
It may be difficult to acquire credit in future
If you follow the debt snowball method strictly, its creator Dave Ramsey, recommends closing down your credit card accounts once they’ve been paid off. While this will stop you from falling victim to the same debt trap, it could make it more difficult to generate the credit you need in the future.
This is because, the fewer credit cards and loans you have, the worse your credit score becomes. It doesn’t sound logical does it, but provided you are making more than the minimum repayments, it builds up your borrowing history, showing lenders you can be trusted to pay the money back.
Although Dave Ramsey would yell at me for saying this (SORRY DAVE!) but an option would be to keep a credit card and use it to pay a utility bill on autopilot each month and pay it off in full each month automatically. This would give you the usage but you won’t have to carry the card with you and be tempted to use it anywhere. The key here is to automate this!
Also, keep in mind this would only be useful if you’re needing credit in the future to say buy a home or get a job. Otherwise, if you’re planning on living a debt-free life then a credit score won’t be as important.
You could end up paying more overall
As the smallest debt is targeted first, if your largest debt has a high-interest rate, you could end up paying a lot more back over time in interest. So, mathematically it may not make financial sense to follow this method until the higher debts have been significantly lowered.
These are the main two cons to be aware of. For most debts, the snowball method does work well. However, if you do have higher debts with a high-interest rate, you may want to consider a different method such as the debt avalanche (more on this in the next section) until you can get them down.
Snowball or Avalanche Method – Which is Right for You?
You’ve learned about the debt snowball method, but did you know there’s a debt avalanche method to paying off debt as well?
Both have their pros and cons and can help you to become debt-free. However, as they work in totally different ways, it’s important to look at which one is most likely going to work for you.
What is the debt avalanche method?
The debt avalanche method works differently to the debt snowball method. Instead of focusing on the smallest debt, it requires you to focus on paying off the debt with the highest interest rate.
While paying off the highest interest rate, you’ll continue to make the minimum repayments on your other debts. So, say you have debts with 17%, 12%, 5.3%, and 3%, you’ll start by focusing on the 17% interest rate debt.
Once that one has been cleared, you’ll move on to the 12% interest debt. So, it’s not about how much you owe in total, it’s about eliminating the high-interest loans first and in turn saving you the most in interest.
Which method saves you the most money?
If you’re looking to save the most money while paying off your debts, the avalanche method will work better IN MOST CASES. This is because, by eliminating the highest interest debt first, you’ll end up paying less back in the long term.
However, there are some instances where the snowball method could save you more money. It’s best to use an online debt calculator (Ex. UNDEBT Calculator) tool to determine exactly how much you could save with each method.
Which will get you out of debt faster?
This really depends upon a number of factors. If you find it easy to stick to things and stay focused in the long-term, the avalanche method could help you to eliminate your debt quicker. However, it will also depend upon how many debts you actually have and how much the debts are.
If the highest interest loan is also the largest loan you have, it’s going to take a significant amount of time to pay it off. So, you’ll save money, but it will feel like it’s taking longer to eliminate your debts as the smaller ones won’t be going down.
With the snowball debt method, you see much faster progress and the smaller debts get paid off quickly. This can make it feel like you’re getting out of debt faster and it also helps to keep up motivation levels.
If we go back to the example of Maria, it would take her a really long time to pay off her second credit card if that was the one with the higher interest rate and the smallest one would linger on longer with just the $20 minimum payment. So paying off that first card using the snowball method would make more sense psychologically and again give you that quick win to keep going!
Choosing the best method to fit you
So, which method is right for you?
If you have lots of debts, the snowball method is likely going to suit you better than the avalanche method. This is because it delivers consistent results which can help to keep you motivated. With the avalanche method, you’ll typically be clearing the debt much slower than you would with the snowball method, so if you have lots of debts this could prove problematic.
So, in order to decide which method is right for you, it helps to keep the above information in mind. As you can see, there are benefits to both methods and the end result is the same – you’ll enjoy being debt-free. You just need to ensure that you’re following the right path to get you there.
COMBINING THE TWO METHODS
One thing I recommend doing for those who are undecided about which method to choose is to combine the two methods.
You can combine the two methods by listing your debts in order smallest to largest first and then look at debts and their balances. If there are debts with close balances then go ahead and list those by higher interest rate first.
This way you are saving on interest but still getting quick wins as well.
TAKE ACTION AND BECOME DEBT FREE
My main tip here is to take action on your debt! Start by grabbing my FREE BUDGET PRINTABLES below and get on my list where I send you all kinds of money-saving tips as well as freebies to help you with your money journey.
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I have heard a lot about this method but have not used it yet. I think it’s time for me to try it! Thanks for a great post!