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Debt snowball method

Snowball your way out of debt with this popular 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.

What is the debt snowball method?

The debt snowball method is a debt-reduction strategy. Its claim to fame is that it can help keep you motivated and gain momentum by knocking out your smallest balances first.

It works like this:

  1. Organize your debts from smallest to largest by dollar amount.
  2. Create a budget and determine how much you can spend each month to pay down your debts.
  3. Make minimum payments on everything, and put any extra money toward the smallest debt.
  4. Once the smallest debt is paid off, move down your list and continue paying everything down while allocating the most money to the smallest debt.
  5. Keep the snowball rolling and continue paying off your smallest debts first until you’re completely free of debt.

The debt snowball method may not be the most cost-effective way to pay off your debts — since you’re not paying off the highest-interest debts first — but it can help keep you motivated by giving you mini-wins throughout the process.

Why doesn’t the debt snowball method take interest rates into account?

Because the debt snowball method is designed to keep you encouraged. It tackles the smallest debts first so that you can close those accounts faster and have less looming over you.

Ramsey’s site — the financial guru who popularized this method — addresses this concern directly:

“Now, before you start arguing about the interest rates, hear us out. If your largest debt has the largest interest rate, it’s going to be a long time before you start to see a dent in that crazy balance of yours. But when you stick to the plan (without worrying about interest rates), you’re going to be jumping up and down when you pay off that smallest debt super quick.”

    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.

    DebtBalanceMinimum payment
    Credit Card A$500$40
    Personal Loan A$1,500$80
    Credit Card B$1,600$80
    Car Loan$6,000$120
    Student Loan$14,000$345

    After making the minimum payments each month, he puts the extra $85 toward his smallest debt: Credit Card A.

    Once that’s fully paid off, he tackles his next-smallest debt: 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.

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      Debt snowball vs. debt avalanche

      The debt avalanche method is another debt-reduction strategy. It’s similar to the snowball method, but instead, you focus on paying down the debts with the highest interest rates. This strategy focuses on saving you money on interest rates and getting rid of costly debts first.

      The avalanche method works like this:

      1. Organize your debts from the highest interest rate to the lowest.
      2. Determine how much money you can allocate toward paying off your debts.
      3. Make minimum payments on all debts, and then allocate any extra money to the loan with the highest interest rate until that loan is paid off, then work down the list.
      4. Continue paying everything down until you’re debt free.

      Numbers-wise, the avalanche method is the most cost-effective. However, some people might find it hard to stay motivated. The snowball method may be better suited for someone who likes the mini-wins of paying off little balances first.

      Pros and cons of the debt snowball method

      There are benefits and downsides to this debt management strategy.

      Pros

      • Free strategy to help you get out of debt
      • Help you tackle debt quickly
      • Stay motivated with small wins frequently

      Cons

      • Not the most cost-effective, since you may not be tackling high-interest debts first
      • May take a long time to pay off large balances

      Alternatives to the debt snowball method

      If you’d rather take on your most expensive debts first, or need a different strategy altogether, consider these other debt management options:

      • Debt consolidation. Debt consolidation involves getting one large loan to pay off multiple balances. It doesn’t reduce your total owed amount, but does reduce how many monthly payments you have to keep track of. And if you get a low rate on the consolidation loan, you could save money on interest charges long-term.
      • Balance transfer credit cards. Similar to debt consolidation, this involves moving debt(s) onto a balance transfer credit card, typically with the intent of having a lower interest rate on the card to save money.
      • Debt relief programs. These vary, but debt relief programs can involve consultations, negotiations with your creditors, payment plans and more.
      • Home equity loans. If you have a home with at least 20% equity, you could get a home equity loan to pay off some debt. Many home equity loans have very low interest rates, especially compared to personal loans or credit cards, which could save you money long term.
      • Other debt payoff methods. Snowballing isn’t the only one. There’s the debt avalanche method, snowflake method, payment splitting, and much more.

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