If you’re carrying extra debt, you know how frustrating it can be. Paying off your debt early can solve those problems, but that’s easier said than done. In fact, it’s often hard to know where to start, especially if you’re still living paycheck to paycheck.
The debt snowball method is a simple and effective strategy that thousands of people have successfully used to get out of debt. We’ll cover what the debt snowball method is and how you can use it, along with tips to stick with the plan so you can reach your goals no matter what life throws at you.
What is the debt snowball method?
Any worthwhile journey starts with a roadmap, and that’s essentially what the debt snowball method is.
You’ll create an ordered list of your debts from smallest to largest, and focus on paying off your smallest debt first. When that’s done and you’ve freed up that monthly payment, you’ll roll it into your payment for the next debt until that one is paid off, too. You’ll repeat this process until everything is paid off.
In fact, the name “debt snowball” actually comes from how this strategy works. Each time you pay off a debt, your monthly payment for the next one becomes larger and larger as you go on. All of those cumulative monthly payments will be combined into one giant snowball payment that allows you to make quick progress in paying down your last, largest debts.
The debt snowball method was made popular by media personality and finance guru Dave Ramsey. It works because it’s simple, and anyone can use it.
Pros and cons of the debt snowball method
Pros
- Simple and easy strategy: Anyone can use the debt snowball method. It’s free and easy for anyone to do, especially if you’re getting out of debt with bad credit.
- Gets rid of more required debt payments sooner: You’ll shed more minimum monthly payments faster. Your budget will still claim that money to pay off other debts, but you don’t need to worry about having as many financial obligations if you run into a rough patch later.
- Helps maintain motivation to pay off larger debts: From a psychological standpoint, the quick wins you get in paying off many debts upfront can help you stay excited to keep going later with larger debts.
Cons
- Not as efficient as the debt avalanche method: The debt avalanche method works similarly, but has you pay off more expensive debts first. You can save a bit more money and get out of debt slightly sooner than with the debt snowball method.
- Ties up the same amount of cash in your monthly budget: You’ll technically be free of more monthly payments sooner, but that doesn’t mean you can spend the cash. If you follow the plan, you’ll use that extra money to pay off more of your debt.
How to use the debt snowball method: A step-by-step guide
The beauty of the debt snowball method is that it’s easy to follow, and you can jump back in at any time if you get derailed while paying off your debt. That said, there are some ways you can prepare yourself to ensure your long-term success. Here’s how to do it:
1. Get your finances ready
Create a monthly budget so that you know how much extra you can afford to pay toward your debt each month. This is your “snowball payment,” the amount of extra money you’ll send in with your minimum required payment. It’s also a good idea to save up a small emergency fund first so that you can stay out of debt once you start paying it down.
Example: According to your budget, you pay $1,000 minimum toward your debts each month, with $50 extra to spare. You also have a $1,000 starter emergency fund.
2. Create an ordered list of your debts from smallest to largest
Look up the balance of each of your debts and put them in order from smallest to largest. This is the order in which you’ll pay off your debts.
Example: Your list of debts, from smallest to largest, includes:
- Credit card 1: $450 balance, with a $15 monthly payment
- Credit card 2: $820 balance, with a $20 monthly payment
- Personal loan: $4,245 balance, with a $135 monthly payment
- Mortgage: $125,000 balance, with an $830 monthly payment
3. Pay off the smallest debts first
Make the minimum payment on all of your debts, but pay extra toward the debt with the smallest balance. Check your budget to see what you can afford each month, and send any extra money you earn each month to this debt, too.
Example: You make the minimum payments on all debts except Credit Card 1. For this one, you’ll send in $50 extra on top of the $15 minimum payment. You pay it off in eight months, and your snowball amount is now $65 ($50 to start, plus the $15 that’s now free in your budget).
4. Apply your payments to the next debt on your list
When you pay off that debt, you’ll take that payment amount and roll it into your snowball payments toward the next debt on your list.
Example: You start rolling that $65 snowball toward Credit Card 2, which you pay off in 18 months from when you began. That frees up another $20 in your budget, making your snowball payment now $85.
5. Continue until all of your debts are paid off
Keep rolling all of your monthly payments together until you’ve paid off all of your debts entirely. One caveat is that some people choose to stop at paying off their mortgage, since it’s such a large debt and often comes with a smaller interest rate than credit card debt. It’s up to you whether you use the snowball method to eliminate your mortgage; if you do, you could become debt free years earlier.
Example: You add the $85 snowball payment to your $135 personal loan payment until that debt’s gone, too. This frees up $220 for your next snowball, which you’ll then send in with your $830 mortgage payment. Paying $1,050 toward your mortgage each month allows you to make ultra-quick progress in paying off your debt.
When all is said and done, this snowball strategy allowed you to save $73,500 in interest and pay off all of your debt nearly 12 years sooner than if you’d only paid the minimum on all of your debts. That’s the power of the debt snowball.
Debt snowball method vs. debt avalanche method
The debt snowball method is very similar to the debt avalanche method, another popular debt payoff strategy. Rather than putting your debt in order from smallest balance to largest, the debt avalanche method orders your debts from highest to lowest interest rate.
Paying off the debt with the highest interest rate first makes more sense from a mathematical perspective. After all, paying a higher interest rate means a debt is more expensive. When you get rid of that debt first, you could save even more money and get out of debt sooner in the long run.
Many people still prefer the debt snowball method because it’s easier to focus on quick wins. Sometimes, your smallest debts are actually your cheapest debts. If you were to focus on larger and more expensive debts first, it can be harder to sustain the motivation to keep going.
Final thoughts
The debt snowball strategy is a powerful tool in helping you become debt-free. In order to use it, though, you’ll need to find extra money in your budget to pay extra towards your debts. If you’re not able to do that, one option is to use something like a home equity investment (HEI) to quickly pay off your debts with no monthly payments required until you repay the funds later, along with a slice of your home’s future equity.
Otherwise, here are some ways you can increase your income and cut your expenses so that you can build your snowball payments faster:
- Start a side hustle.
- Ask for a raise at work.
- Cut unnecessary expenses.
- Find a higher-paying job or career.
- Avoid taking out new debt unless it’s necessary.
- Negotiate with your lenders for a lower interest rate.
- Consider a debt consolidation loan to pay off higher-interest debt.
- Build your credit score to save money on car insurance and future borrowing costs.
- Explore all your debt relief options, but remain mindful and aware of the pros and cons of different techniques.
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