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So, you’ve heard of the debt snowball and you’re wondering if it’s worth a try?
Made popular by financial guru Dave Ramsey, this method makes it easy to pay off your debt by giving you small victories right away. No matter how much debt you have, you can snowball it away – little by little.
In this post, I’ll show you how to apply this method to your personal debts. But first, let’s find out if the debt snowball is right for you.
Pros and Cons
There are two primary strategies for paying off debt – the debt snowball and the debt avalanche.
Unlike the debt avalanche (where you pay off debt with the highest interest rate first), the debt snowball allows you to make progress faster by paying off your smallest debts first.
It’s a mental game.
If you have trouble sticking to a debt payoff plan, this method will keep you motivated. You’ll see a reduction in the number of debts you owe, and you’ll get a warm fuzzy feeling when you knock out those smaller debts. The momentum will keep you moving toward paying off the larger ones.
The one and only drawback to the snowball method (that I can see) is that you’ll pay more money in interest over time. Because you aren’t paying off the highest interest debts first, they will rack up more in interest charges while you’re paying off the small debts.
Many people think this trade-off is worth it, and I’m one of them.
If you’re a natural spender (like me), and you have difficulty sticking to a debt payoff plan, the debt snowball will work for you. I know, because I’m using it to pay off my own debt.
In the end, you will pay a little more money in interest, but you’ll also keep yourself mentally on board for the long-term payoff. It feels amazing when you get your first credit card or loan paid off, and it motivates you to keep going.
How to Use the Debt Snowball
After you create a budget, you’ll know how much you have each month to put towards debt. If you don’t have a budget yet, get busy! Create a budget and save a small emergency fund before you get serious about paying off debt.
Here’s how to use the debt snowball in three steps:
- List your debts in order from smallest to largest.
- Put all your extra money toward the smallest debt, while making minimum payments on the remaining debts.
- Once the first debt is paid, put all your money – including what you were putting toward the first debt – toward the second one.
Repeat this process until all debts are paid.
This method creates a “snowball” effect where you have more money each time a debt is paid to pay on the next one.
How it Works
Let’s look at an example of how the snowball method works if these were your debts:
|Visa||$ 550||$ 22||20%|
|Mastercard||$ 695||$ 28||20%|
|American Express||$ 1,200||$ 48||20%|
|Student Loan||$ 5,000||$ 52||6%|
|Car Loan||$6,000||$ 216||3%|
Here’s what the snowball would look like:
In the example above, the whole $13,445 would be paid off in 29 months, with $992.24 paid in interest. Of course, the more money you can find to put towards detb, the faster you’ll be debt-free.
Minimum Payments and Interest Rates
Log in to your credit card and loan accounts and get the current minimum payment for each one. While you’re there, get your interest rate too.
For credit cards, the interest rate may be hard to find. (I wonder why…) Download your monthly statement and look at the fine print.
Also, in case you weren’t clear, stop using credit cards and racking up debt immediately.
If you’ve recently been using your credit cards and you aren’t sure what your minimum payments will be, you can use this minimum payment calculator from Green Path. To calculate student loan payments, try this one from Student Loan Hero.
When You Can’t Afford Your Minimum Payments
If you don’t have enough money to cover all your minimum payments, you can still use the snowball method. Here’s what you do:
- List all your debts in order from smallest to largest.
- Make the minimum payments on as many as you can afford, starting with the smallest.
- As you free up money from paying off the smaller debts, start making the minimum payments on the larger ones.
Let’s look at an example if these were your debts:
|Visa||$ 550||$ 22||20%|
|Mastercard||$ 695||$ 28||20%|
|Student Loan||$ 1,000||$ 10||6%|
|Personal Loan||$ 2,000||$ 169||3%|
The total minimum payments are $229, but what if you only had $200 to put towards debt?
You would make the minimum payment on the first three debts and whatever you could on the last one. In this case, it would be $140.
After the Visa card is paid off, take the $22 from the minimum payment and put it toward the personal loan. Once the Mastercard is paid, take the $28 and apply it forward.
Yes, this method will take forever because you have no momentum. It’s only a place to start.
If you find yourself in this situation, you must increase your income. Period. Get a second job, work overtime, have a yard sale, or sell some stuff on Craigslist. Do whatever you can to make more money and apply it toward your debt.
Is the Debt Snowball Right for You?
The debt snowball method plays on your emotions to keep you motivated while you’re paying off debt. The small triumphs along the way help you feel a sense of accomplishment sooner, so you’re less likely to give up.
Yes, you’ll pay more in interest than if you use the debt avalanche method, but there’s also a better chance you’ll succeed long-term. And that’s the real goal – to finally be debt-free and back in control of your finances.
Thousands of people have paid off their debt this way, and you can do it too. Just like any goal worth achieving, it will take hard work and dedication. But you can do it.
No, you will do it.
Repeat that to yourself until you know it’s true. Get out there and kick debt’s butt. Now you’re equipped with the knowledge to make it a reality.
What’s your experience with the debt snowball method? Have you tried it yet? Leave a comment below!