If your life goals are frozen due to the burden of debt, it’s time to put on the gloves and start packing a snowball. We’re going to show you ways to keep rolling this snowball until it rolls over your debt. Then, your once-frozen future will potentially start to thaw.
The strategy is called the debt snowball method, and it was promoted by financial guru Dave Ramsey . It involves a number of can-do instructions that are easy to take; little steps like these can lead to giant-step life changes.
The goal: debt reduction. The rules are super-simple: simply pay off your debts in the order of smallest to largest, gaining momentum as each balance is paid off (hence, the snowball!). Once your smallest debt is obliterated, you roll that money into your next smallest balance, and so on.
Here are the general steps (but we’ll drill down later on):
1. List your debts from smallest to largest.
2. Make minimum payments on all your debts except the smallest.
3. Pay as much as possible on your smallest debt.
4. Repeat until each one of your debts is paid in full.
Thoughts Behind the Snowball Method of Paying Down Debt
It’s all about changing your behavior. Getting rid of your smallest debt first can work wonders because it gives you a psychological boost. Try paying down your largest debt first, and it can feel like throwing a pebble into an ocean.
The numbers on that large debt will start to decrease, for sure, but it’s probably not going to give you the same feeling you’ll get by kicking the butt of your smallest debt first.
You keep working on that large debt and you might start to feel hopeless, especially with all of those other debts mocking you in the meantime. And that’s the last thing we want for you.
Pay that small debt first and after you’ve accomplished something, you’ll feel empowered to move on to the next one. Those debts will see you coming like a Death Star.
By the time you are ready to take on the Big One (your largest debt), you’re going to be in fighting shape financially, with some freed-up cash. That last debt can get obliterated in almost no time.
A Word about Paying off High-interest Debt First
You may be thinking that it would make more sense to first tackle the debt that comes with higher interest rates and large balances.
And while that makes sense from a financial perspective, because it means you’d pay less in interest over the life of your loans, the statistics suggest a different solution. It turns out that psychologically, getting rid of your smallest debts first often help give you the momentum you need to pay off debt sooner.
• A study by Northwestern University’s Kellogg School of Management found that “consumers who tackle small balances first are likelier to eliminate their overall debt” than trying to pay off high-interest-rate balances first.
• Even the Harvard Business Review came to the same conclusion . Their research suggests that people are more motivated to get out of debt not only by concentrating on one account but also by beginning with the smallest account.
Why Making Minimum Payments on Your Credit Cards Probably Won’t Cut It
Even if the minimum payments on your credit cards are somewhat manageable, they’re a trap. It’s more than likely that paying only the minimum on your debt will keep you paying on it for years to come—and paying way more money than any amount you originally borrowed. That’s because most credit card companies make their money from you by charging high interest rates and charging compounding interest on balances not paid in full each billing cycle.
The Snowball Plan, Step By Step
These steps could have you watching your once-stifling debt start shrinking, giving you room to breathe:
1. List all of your debts from smallest to largest. 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. Be sure to continue to pay the minimum payment on every debt.
3. Nail down how much extra you can pay toward that smallest debt (the first debt on your list).
4. Pay the minimum payment on that smallest debt, but also add in that extra amount from step three. Repeat until that bad boy is paid off.
5. Once that smallest debt is paid off, you add that extra amount to your next smallest debt on the list. Now that second debt is on its way to being shown the door.
6. Rinse and repeat until you are completely debt free.
A Word About Principal Reduction
It’s a good idea to find out how your lenders apply extra payments to your debt (they don’t all do it the same way) before you start this process. Some debt companies that handle mortgages, school loans, or car payments need to hear from you about how you want any extra money to be applied (to principal or interest). Credit card companies, though, typically apply your entire payment to the current billing cycle.
Perks of the Snowball Method
The biggest plus is probably psychological. It’s great to see the results of your being proactive, and seeing your overall debt total getting smaller. It’s a feeling of, “if I can do this, I can do anything.” With fewer debt obligations every month, you’ll probably also feel less burdened.
Of course, the flip side is that if you’re tackling your smallest debts first, your high-interest debts may be accruing interest for quite a while. Ultimately, the snowball method may be the most effective psychologically, but it isn’t the most cost effective.
Alternatives to the Snowball Method
Of course, there are other ways to pay off debt. Here are just two:
The Avalanche Method
Yep the name sounds cooler, and it’s also known as the “debt-stacking” method. In contrast to the Snowball Method, the Avalanche Method is all about saving money on high interest rates. We’ll warn you that this method is not as simple as paying off your smallest debt first.
This one involves making a list in order of your interest rates, with the highest interest rate being first on the list. Keep your eye on those rates all along the way, because if they’re variable rates, they are bound to change. Here, you would focus on paying down the interest on the debt with the highest interest rate with as many extra payments as possible.
The Debt Snowflake Method
The Debt Snowflake Method involves simply finding extra income through a part-time job or, for example, selling some of your stuff online, and sprinkling that extra cash on your debt obligations every day. Those extra payments might come from some fancy footwork on your part, but could go a long way to helping you become debt-free.
Consolidating Your Debt
Merging all of your debt into one unsecured personal loan could make it easier to pay down your debt each month. Merging all of your debt into one personal loan makes it easy to pay each month. For example, taking out a personal loan to consolidate all your high-interest credit card debt leaves you with the one payment per month.
This makes the most sense if you consolidate all of your high-interest debt with a loan that comes with a lower interest rate. Boom. Rather than face the risk of defaulting on your credit cards or making late payments (which will affect your credit rating), the convenience of one personal loan with one monthly payment can streamline your debt repayment process.
If you’re considering this strategy, check out SoFi Personal Loans. You may qualify for lower rates than what you’re paying now (and there are no fees, even for prepayment)– and it only takes two minutes to check your rates.
“External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.“