How to Use the Snowball Method to Pay Off Debt

If you’re in debt, you’re not alone.

In fact, according to a report by the Federal Reserve, the average American household has around $137,063 in debt.

Yikes!

But don’t despair, there is a way out.

One method that has proven to be effective in getting out of debt is the snowball method.

What is the debt snowball method?

Simply put, the snowball method is a debt repayment strategy where you focus on paying off your smallest debt first, while making minimum payments on your other debts.

Once your smallest debt is paid off, you then focus on your next smallest debt, and so on, until all of your debts are paid off.

The reason this method is so effective is because it helps to keep you motivated.

As you see your debt balances shrinking, you’ll be motivated to keep going.

Plus, once you’ve paid off a few debts, you’ll have extra money each month that you can put towards your other debts, which will help you pay them off even faster.

How do you use the snowball method to pay off debt?

Focusing on the full amount of your debt can seem daunting (and discouraging).

For your mental health and sanity, break down the process in small action steps to get started on your goals. 

It may be something like this:

1. Make a list of all of your debts, from smallest to largest. Include the name of the creditor, the balance, the interest rate, and the minimum payment.

2. Make a budget and determine how much extra money you can put towards your debt each month.

3. Begin making payments on your smallest debt, while making the minimum payments on your other debts.

4. Once your smallest debt is paid off, move on to your next smallest debt and continue making the same payments.

5. Repeat until all of your debts are paid off.

Once the smallest debt is paid off, you don’t pocket the extra money.

Instead, you take the entire amount you were paying on that first debt and apply it to the next smallest debt-this is the “snowball” effect.

You continue to make minimum payments on the rest of your debts.

As you pay off each debt, the amount of money you can throw at the next debt increases, just like a snowball rolling downhill gathers more snow.

Over time, the increased payments will help to clear your debts more quickly than if you were just making minimum payments across the board.

The key to success with the snowball method is to stay disciplined and committed throughout the process, keeping the momentum going until all debts are cleared.

What is not recommended in the debt snowball method of getting out of debt?

The debt snowball method, while popular for its psychological wins, is not without its critics, particularly when it comes to financial efficiency.

One major drawback is that this method does not take into account the interest rates on debts.

By focusing solely on the balance amounts and not on how much interest is accruing, you may end up paying significantly more over time.

High-interest debts continue to compound, potentially negating some of the progress made by paying off smaller, lower-interest debts.

Financial experts often suggest that paying off high-interest debts first-known as the debt avalanche method-can be a more cost-effective strategy, even though it may not provide the same immediate emotional satisfaction of quickly eliminating a debt.

Another aspect not recommended in the snowball method is the potential neglect of building an emergency fund.

Some proponents of the snowball method advise to aggressively pay down debt with all available funds, which can leave individuals without a financial cushion in case of unexpected expenses.

This can be risky, as any sudden need for cash might force one to rely on additional borrowing, thereby perpetuating the cycle of debt.

Financial advisors often recommend establishing at least a modest emergency fund before, or concurrently with, paying down debt to mitigate this risk.

Which debt do you tackle first?

When deciding which debt to tackle first, the answer varies depending on the strategy you choose.

The debt snowball method suggests paying off the debt with the smallest balance first to quickly achieve a sense of accomplishment and build momentum.

Conversely, the debt avalanche method prioritizes debts with the highest interest rates, as this can save you money over time by reducing the amount of interest you pay.

A third approach, the debt snowflake method, involves making small, frequent payments towards your debt as soon as extra money becomes available, without waiting for a larger sum to accumulate.

Ultimately, the choice depends on what motivates you most and your financial goals; some people need the quick wins of the snowball method to stay on track, while others prefer the long-term savings of the avalanche approach.