The Debt Snowball Method: How Does It Work?

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The debt snowball method is a debt repayment strategy popularized by Dave Ramsey. Psychology is used to motivate you to pay off your debts faster.

If you need a kick in the ass to save and pay off what you owe, the debt snowball method may be an effective solution for you. But it could cost you money in the long run.

If you are already motivated to pay off your debts and want to move forward with achieving financial freedom, you are better off using another strategy, such as the debt avalanche method.

In this guide to the debt snowball method, we’ll explain how it works, its benefits, and its drawbacks.

How does the debt snowball method work?

With the debt snowball method, you focus on paying off your debt balances in order of size, starting with the smallest. This helps you build momentum.

While using the debt snowball method, it is important that you continue to pay the minimum amount of all your other debts at the same time.

Once you pay off your smaller debt, you put the money you were setting aside for it toward the next smallest balance. Repeat this process until all of your debts are paid.

As you keep putting your money down to pay off larger and larger amounts of debt, it’s like rolling a snowball – hence the name.

The fun of getting rid of debt balances one by one keeps you motivated to use this method until you have a clean balance sheet.

However, there is a huge problem with the debt snowball method. Because you prioritize your lowest balance first, rather than your higher interest debt, you lose money on interest charges.

How do you use the snowball method for debt?

Before you figure out how much money you want to pay to pay off your first balance, make sure you have enough money in your budget to cover the minimum payment for each of your debt accounts.

Then split your debts. Review all of your debts and rank them from lowest debit balance to highest. The smallest debt will be your first goal. We recommend keeping track of your balances either in a notebook or – if you’re an Excel fan – in a spreadsheet.

Every month, make the minimum payment for each debt, regardless of size (after all, the last thing you need is a drop in your credit score).

Find out how much extra money you can set aside each month to pay off debt. To pay off your balances faster, you may want to select a side hustle or two and direct your winnings toward the cause.

Now, pay that extra amount toward the smallest debt until it’s paid off. Once you kiss that balance goodbye, be sure to draw a big red line through it in your notebook or delete that spreadsheet row. Give a wonderful feeling!

Next month, simply transfer the extra money you’ve been putting toward the smallest debt (including the minimum payment) to the next balance on the list.

Keep working until you are debt free.

Example of Debt Snowball in motion

To give you an example of how the debt snowball method works, let’s use my imaginary friend Luli.

Here are the accounts of Lolly’s debts:

  • Credit Card A: $500 (minimum $50 payment)
  • Credit Card B: $2000 (minimum $100 payment)
  • Auto Loan: $5,000 (Minimum $300 Payment)
  • Student loan: $30,000 (with a minimum payment of $400)

After checking her budget, Lolly decided she could set aside $1,200 for her total monthly payment to pay off her debts.

At the start of the debt snowball process, Lully owed $850 toward minimum payments. This would leave her with $350 for her extra status.

For the first month, she paid all her minimum and applied $350 to her A credit card, which is her lowest balance. Since she also paid the credit card issuer $50 for the minimum monthly payment, she now owes only $100 on that card.

The following month, I paid a discount to credit card A and put the remaining $300 in credit card B.

A month later, since she no longer owes money on Credit Card A, she can set aside the $50 she was paying each month as a minimum payment for Credit Card B.

Rinse and repeat.

Advantages of the snowball method for debt

The biggest advantage of this method of debt repayment is the motivation you receive from writing off debt from your list.

Since it’s easy to see the progress you’re making, you’ll get a massive psychological boost. You will be confident that you will be able to pay off the debt.

And because you will feel that you have more control over your financial situation, you will eliminate stress and anxiety.

This makes the debt snowball method a good option for those of us who spend the night worrying about how to pay off all of our credit card debt. (I was there.)

It may also motivate you to find additional ways to make money – either by doing a side hustle or by finding a steady stream of passive income.

Disadvantages of the snowball method for debt

The biggest drawback to using the snowball method is that you may end up paying extra money with interest over time.

That’s because this method of paying off debt involves starting with smaller balances first, rather than a credit card or personal loan with the highest interest rate. Your most expensive debt may vanish, accumulating additional income fees that you may not have to pay if you dealt with it first.

If you carry credit card debt with a high interest rate, the debt snowball method may not be an effective way to pay off what you owe.

Alternatively, you may want to consider using the debt avalanche method.

How does the debt avalanche method work?

Unlike the debt snowball method, which prioritizes small debt, the debt avalanche method involves paying off the balances with the highest interest rates first.

The debt avalanche method is the most cost-effective strategy for debt reduction. It can also be faster than using the debt snowball method or any other debt repayment strategy.

As with the debt snowball method, you’ll pay the monthly minimum. But you will put your extra money into the account that charges you the highest interest rate. Usually, that would be credit card debt.

You will not get the instant gratification that you receive from a debt snowball strategy. But the debt avalanche method can end up saving you money in the long run, putting you on your path to financial freedom.

Frequently Asked Questions

Here are the most frequently asked questions about the debt snowball method.

Does the debt snowball really work?

Using the debt snowball method can be an effective debt repayment strategy. However, you may end up losing money on interest charges – especially if you carry a lot of credit card debt. This is because you allocate your additional payment to the smallest balance, rather than the account that charges the highest interest rate.

What are the four steps of the snowball approach to debt?

  • Step 1: List your debts from the smallest balance to the largest balance.
  • Step 2: Make a minimum payment for all of your accounts.
  • Step 3: Put extra money against the smallest balance on the list until you pay it off.
  • The fourth step: Repeat the process until you have paid off all of your debts.

What is the best way to pay off debt?

Mathematically speaking, the debt breakdown method is the most effective way to pay off all of your debt. This is because it handles higher interest rates head-on, saving you money while you pay off every balance.

However, some people need faster results to stay motivated. They may prefer the psychological rewards of the debt snowball method.

The debt repayment method you decide to use is your personal choice. Find what works for you, and stick with it!

bottom line

If you’re worried about how you’re going to pay off all your debt and can use a serious stimulus boost, the debt snowball method can be a great strategy. As you remove annoying spinning balances, you will feel invincible.

(And trust me, few things in your financial life will feel like kissing goodbye to debt.)

However, if you prefer cold, harsh logic over emotional gratification, the debt avalanche method is a more effective strategy. Not only will you pay off your debts faster, but you will save money in the long run.

Once you get rid of your debt, you may be wondering: What next? Well my friend, it’s time to get serious about financial freedom.

Financial freedom is the peace of mind that comes from not worrying about money. All your expenses have been covered, thanks to steady streams of passive income.

Whether you’re about to pay off your debt – or you’re just getting started – it’s time to think about how you can achieve financial freedom.

Our team has put together an in-depth course to show you exactly how you can get there, no matter what’s going on in the economy.

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