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Debt snowball method
Build on your previous success with this debt relief strategy.
Popularized by financial guru Dave Ramsey, the debt snowball method is a way to tackle your debts a little at a time. If you’re intimidated by how much you owe, this strategy allows you to celebrate small victories and build momentum toward a debt-free life.
How is the debt snowball method calculated?
The debt snowball method helps you pay down your debts in order of smallest to largest, snowballing your payments as you go. It’s designed to keep you encouraged. It tackles the smallest debts first — regardless of interest rates — so that you can close those accounts faster and have less looming over you. Follow these four steps to get started:
1. Determine how much you can spend on debt.
Create a budget that accounts for all of your spending, cutting out unnecessary expenses to increase the amount you have each month to put toward paying off your debt.
2. List your debts from smallest to largest.
Unlike the debt avalanche method, you only need to pay attention to the dollar amount of the loan or credit card — not the interest rate or overall cost. Although it may be less cost effective, the debt snowball strategy is designed to give you the confidence to keep going until everything is paid off.
3. Pay as much as you can toward the smallest debt.
After making the minimum monthly payments on all of your debts, put any extra money toward your smallest debt.
4. Repeat with the next-smallest debt.
Once that account is paid off, take the money you were using towards it and apply it toward your next-smallest debt. Keep the snowball rolling and continue paying off your smallest debts first until you’re completely free of debt.
The debt snowball method in action
Let’s take a look at an example: Jacob is a single man in his late 20s who’s spent the last few years building his career. He’s recently gotten into a position where he can dedicate an extra $85 a month toward his loans and credit card bills.
Since he’s overwhelmed by how much debt he has, he decides to use the debt snowball method to stay encouraged.
To begin, Jacob lists out his debts from smallest to largest.
|Credit Card A||$500||$40|
|Personal Loan A||$1,500||$80|
|Credit Card B||$1,600||$80|
After making the minimum payments each month, he puts the extra $85 he has toward his smallest debt: Credit Card A.
Once Credit Card A is fully paid off, he tackles his next-smallest debt, Personal Loan A, combining the money he was using to pay Credit Card A with what he is already paying towards Personal Loan A. Since he no longer has the $40 minimum payment for Credit Card A, he’s able to put an extra $125 a month toward paying down that loan.
He then repeats this process, paying off the next-smallest debt, until all of his credit cards and loans are fully paid off.
Compare solutions to pay off your debt
The debt snowball method may not be the most cost effective way to pay off your debts, as it doesn’t take into account interest rates, but it can help keep you encouraged by giving you mini wins throughout the process.
Want to explore more options for tackling your debt? Check out our guide to debt consolidation here.
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