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.
Key Points
• The snowball method lists debts from smallest to largest, focusing on the smallest first.
• Quick wins and a sense of accomplishment are key psychological benefits.
• The avalanche method targets high-interest debts to save on interest.
• The snowball strategy builds momentum, though the avalanche technique can be more cost-effective.
• The best approach for debt payoff depends on individual circumstances and goals, with personal loans being another popular option.
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.
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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.
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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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