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Dealing with debt can be a very stressful experience and make you feel as if you’ll never be able to pay off what you owe. If you find yourself struggling to manage multiple debts, the snowball method can provide a practical and effective strategy to regain control of your financial situation. This method, popularized by personal finance expert Dave Ramsey, focuses on paying off debts in a specific order to build momentum and motivation.

Read on to learn how the snowball debt payoff method works, including its benefits, plus alternative payoff strategies you may want to consider.

Building the Snowball

With the snowball method you list your debts from smallest to largest based on balance and regardless of interest rates. The goal is to pay off the smallest debt first while making minimum payments on other debts. Once the smallest debt is paid off, you roll the amount you were paying towards it into the next smallest debt, creating a “snowball effect” as you tackle larger debts.

Getting rid of the smallest debt first can give you a psychological boost. If, by contrast, you were to try to pay down the largest debt first, it might feel like throwing a pebble into an ocean, and you might simply give up before you got very far.

A Word About Paying Off High-interest Debt First

From a purely financial perspective, it might make more sense to first tackle the debt that comes with the highest interest rate first, since it means paying less interest over the life of the loans (more on this avalanche approach below).

However, the snowball method focuses on the psychological aspect of debt repayment. By starting with the smallest debt, you experience quick wins and a sense of accomplishment right away. This early success can then motivate you to continue the debt repayment journey. In addition, paying off smaller debts frees up cash flow, allowing you to put more money towards larger debts later.

Recommended: How to Get Out of $10,000 in Credit Card Debt

Making Minimum Payments Doesn’t Equal Minimum Payoff Time

While you may feel like you’re making progress by paying the minimum balance on your debts, this approach can lead to a prolonged payoff timeline. The snowball method encourages you to pay more than the minimum on your smallest debt, accelerating the repayment process. Over time, as you pay off each debt, the amount you can allocate towards the next debt grows, increasing your progress.

The Snowball Plan, Step By Step

Here’s a step-by-step guide to implementing the snowball method.

1. List all debts from smallest to largest. You want to list them by the total amount owed, not the interest rates. If two debts have similar totals, place the debt with the higher interest rate first.

2. Make minimum payments. Continue making at least minimum payments on all debts except the smallest one.

3. Attack the smallest debt. Put any extra money you can towards paying off the smallest debt while still making your payments on others.

4. Roll the snowball. Once the smallest debt is paid off, take the amount you were paying towards it and add it to the minimum payment of the next smallest debt.

5. Repeat and accelerate. Repeat this process, attacking one debt at a time, until all debts are paid off.

A Word About Principal Reduction

It’s a good idea to reach out to your creditors and lenders and find out how they apply extra payments to a debt (they don’t all do it the same way). You’ll want to make sure that any additional payments you make beyond the minimum are applied to the principal balance of the debt. This will help reduce the overall interest you pay and expedite the debt payoff process.

Recommended: Personal Loan Calculator

Perks of the Snowball Method

The snowball method offers several advantages:

•   Motivation and momentum The quick wins and sense of progress provide motivation to continue the debt repayment journey.

•   Simplification Focusing on one debt at a time simplifies the process, making it easier to track and manage.

•   Increased cash flow As each debt is paid off, the money previously allocated to it becomes available to put towards the next debt, accelerating the payoff timeline.

Alternatives to the Snowball Method

While the snowball method has proven effective for many, it’s not the only debt repayment strategy available. Here are three alternative methods you may want to consider.

The Avalanche Method

The avalanche method involves making a list of all your debts in order of interest rate. The first debt on your list should be the one with the highest interest rate. You then pay extra on that first debt, while continuing to pay at least the minimum on all the others. When you fully pay off that first debt, you apply your extra payment to the debt with the next highest interest rate, and so on.

This method can potentially save more on interest payments in the long run. However, it requires discipline and may take longer to see significant progress compared to the snowball method.

The Debt Snowflake Method

The debt snowflake method is a debt repayment method you can use on its own or in conjunction with other approaches (like the snowball or avalanche method). The snowflake approach involves finding extra income through a part-time job or side gig, selling items, and/or cutting expenses and then putting that extra money directly toward debt repayment. While each “snowflake” may not have a significant impact on your debt, they can accumulate over time and help you become free of high-interest debt.

Debt Consolidation

If the snowball, avalanche, or snowflake methods seem overwhelming, you might want to consider combining your debts into one simple monthly payment that doesn’t require any strategizing. Known as debt consolidation, you may be able to do this by taking out a personal loan and using it to pay off your debts. You then only have one balance and one payment and, ideally, a lower interest rate, which can help you save money.

Often called debt consolidation loans, these loans provide a lump sum of cash, usually at a fixed interest rate and are repayable in one to seven years.

Recommended: How Refinancing Credit Card Debt Works

The Takeaway

The snowball method offers a practical and motivational approach to paying down debt. By starting with small debts and building momentum, you can gain control of your finances and work towards becoming debt-free. It can be a good way to take action and commit to a debt repayment strategy. If it doesn’t suit you, you might consider the avalanche or snowflake method or a personal loan to consolidate debt.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is the snowball method of paying down debt?

With the snowball method of paying down debt, you prioritize paying off the smallest balance first, no matter what its interest rate is. Once that debt is paid off, you prioritize the next smallest debt.

What is the disadvantage of using the debt snowball method?

The disadvantage of the debt snowball method is that, by prioritizing the lowest amount of debt, you may not be paying off the debt with the highest interest rate first. This means your most expensive debt could continue to grow as you pay off smaller debts.

What is the advantage of the debt snowball method?

By tackling the smallest debt first, regardless of interest rate, you can get a psychological boost from successfully paying that off and then build momentum for getting rid of your other debt.

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SOPL-Q225-103

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

The simplest options strategies include purchasing calls or puts — typically called “going long.” For the bearish investor who believes an asset will see price declines over a well-defined period of time, the simplest strategy may be to purchase puts on those assets, also known as a long put strategy.

This strategy allows buyers to benefit from downward price moves while limiting losses to the premium paid upfront. Take a closer look at how long puts work, including their profit and loss potential, breakeven pricing, and how they differ from short puts or other bearish positions.

What Is a Long Put?

The term “long put” describes the strategy of buying put options. The investor who purchases a put has purchased the right to sell an underlying security at a specific price over a specific time period. Being the buyer and holder of any options makes you “long” that option contract.

Because the contract in question is a put, the investor is long the put and expects the put option’s value to increase as the underlying asset declines. The put option holder is bearish vs. bullish on the underlying asset as they expect its price to go down.

Conversely, an investor who sells a put option would hold a short position, which they might do if they expect the price of the underlying asset to rise or remain neutral, instead of fall.

Maximum Loss

In comparison to other options trading strategies, long puts are low risk due to their limited and well-defined downside. The maximum amount an investor can lose is the premium paid at the initiation of the transaction.

Maximum Loss = Premium Paid

Because different options trading platforms have different commission structures (some of which may be commission-free), commissions are typically omitted from profit and loss calculations.

Maximum Profit

The maximum gain for a long put strategy occurs when the underlying asset drops to zero. While this potential gain is also limited and defined, it may exceed the potential downside and could be significant. The maximum gain on a long put strategy is defined as the strike price of the put less the premium paid.

Maximum Profit = Strike Price – Premium Paid

Breakeven Price

The breakeven price on a long put strategy occurs at the strike price less the premium. Note that the formula for the maximum gain and the breakeven price is the same but the metrics represent different outcomes.

The breakeven price is the point at which the investor begins to make a profit. As the price drops past breakeven toward zero, hopefully, the investor can realize the maximum gain possible.

Breakeven Price = Strike Price – Premium Paid


💡 Quick Tip: How do you decide if a certain online trading platform or app is right for you? Ideally, the online investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Why Investors Use Long Puts

Investors utilize a long put strategy for three main reasons:

•   Speculation: The investor identifies an asset they believe will decrease in price over a defined time period. Buying a long put allows the investor to profit from this forecasted price decrease if it happens.

•   Hedging: Sometimes an investor already holds an asset like a stock or exchange-traded fund (ETF), and could be concerned that the price of the asset may drop in the short term, but still wants to hold the asset for the long term.

By purchasing a long put, the investor can offset any short-term losses through gains on the put and keep control of the underlying asset. For most assets, this strategy may serve as relatively low-cost downside protection.

•   Combination strategies: For experienced investors, long puts can be part of complicated multi-leg strategies involving the sale or purchase of other options, both calls and puts, to pursue different investment objectives.

Long Put vs Short Put

In contrast to a long put, a short put options strategy occurs when the investor sells a put. The seller of a put options contract is obligated to buy shares in the underlying security from the option holder at the strike price if the option is exercised.

Short put strategies differ from long puts in structure, obligation, and market outlook:

Long Put Option Example

An investor has been watching XYZ stock, which is trading at $100 per share. The investor believes the $100 share price for XYZ is excessive and believes the share price will fall over the next 30 days.

The investor purchases a long put with a strike price of $95 per share for a premium of $5 and an expiration date of 60 days from today. Because options contracts are sold based on 100 share lots, the price for this contract will be $5 x 100 = $500.

The options contract gives the investor the right to sell 100 shares of XYZ at $95 for the next 60 days.

The breakeven price on this investment is:

Breakeven Price = $95 – $5 = $90

Should XYZ be trading below $90 at expiration, the option trade will be profitable.

If XYZ stock falls to $0 at expiration, the investor could realize their maximum possible profit:

Maximum Profit = $95 – $5 = $90 profit per share or $9,000 per put option

However, if XYZ stock stays above $90 at expiration, the investor would incur their maximum possible loss, and the option will expire worthless:

Maximum Loss = $5 per share or $500 per put option

Even if XYZ rose above the $100 price at purchase, the investor’s loss remains limited to the premium paid, or $500 in this example.

The Takeaway

Long put options provide a potentially accessible starting point for those exploring bearish strategies. The trading strategy may provide limited downside risk and potential profit if the underlying asset declines.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

FAQ

What is the long put option strategy?

A long put strategy involves buying a put option in anticipation that the underlying asset will decline in value. The buyer gains the right — but not the obligation — to sell the asset at a predetermined strike price before the option expires. This strategy can be used to profit from a downward move or to hedge an existing long position. The risk is limited to the premium paid, while potential profit increases as the asset’s price drops.

What is the most successful options trading strategy?

There is no single “most successful” options strategy — success depends on the trader’s goals, risk tolerance, and market outlook. For bearish views, long puts or bear spreads may be appropriate. For bullish views, strategies like covered calls or long calls are commonly used. More advanced traders may use iron condors or straddles for neutral markets. Each strategy carries trade-offs in terms of cost, complexity, and risk-reward profile. No strategy guarantees returns.

How can traders make money on long puts?

To profit from a long put, the price of the underlying asset must fall below the breakeven point, which is the strike price minus the premium paid. As the asset’s price drops, the value of the put typically increases, which may allow the trader to sell the option at a profit or exercise the option to sell the asset at a higher strike price. The lower the asset falls, the greater the potential profit — up to the maximum if the asset drops to zero.

When should an investor consider a long put?

An investor might consider a long put when they expect the price of an asset to decline within a defined time period. This strategy allows them to potentially profit from the downside move while limiting their maximum loss to the premium paid. Long puts can also serve as a form of short-term insurance for a long position in the stock, especially in volatile or uncertain markets. However, because options lose value over time, long puts are generally best suited for situations where a significant price move is expected before expiration.

Photo credit: iStock/Paul Bradbury