Getting rid of debt becomes a lot easier when you set up a plan and have the discipline to stick to it. That's why finance experts came up with debt repayment plans like the debt snowball method.
The gist of this method is that you tackle your debt starting with the smallest balance, working up to the largest one, until they're all gone. This approach capitalizes on the motivation you feel after clearing a debt. Here's how it works.
What is the snowball method?
The snowball method is a debt repayment strategy where you pay down the smallest balance first and do it progressively until you get to the largest balance. By that time, you'll have all the smaller debts out of the way, which will allow you to focus your resources on getting rid of the largest one—and, eventually, become debt-free.
How does the snowball method work?
The debt snowball method has this name for a reason: Repayment starts small and grows over time, which creates the snowball effect. The strategy is very straightforward:
- List all of your debts, from smallest to largest balance (regardless of the interest rates—this is not taken into account here).
- Make minimum payments on every debt except the one with the smallest balance.
- Pay all the extra money you have toward the debt with the smallest balance, making full (or higher) payments until it's gone.
- Take the money you've been putting toward the smallest balance and use it to pay down the next smallest until it’s gone too (keep paying the minimum payments on the others).
- Keep repeating this process until you get to the last debt (the one with the largest balance), then pay it down until you're completely debt-free.
Why does this work? Because successfully eliminating one debt after another helps you build momentum and keeps you motivated, says Andrea Woroch, a consumer savings, budgeting specialist, and author of Pivot with Purpose. The relief of having one less debt and extra money to tackle any others is a big part of what makes this method work.
Debt snowball method: Example
Here's an example of how the debt snowball method works in practice. In this scenario, you have three sources of debt:
- $1,000 in medical debt with a minimum payment of $50
- $1,500 in credit card debt with a minimum payment of $40
- $10,000 car loan with a minimum payment of $400
You have $900 available monthly to put towards debt repayment. Applying the snowball debt method here, you would need $440 to cover the minimum payments of the two largest debts, the car loans and the credit card debt. This would leave you with $460 to pay down your medical bill, which is the smallest of the three.
It should take two to three months to completely pay off the medical bill. After that, you'd have $500 to put toward the credit card debt, which is the second smallest balance. Once that’s paid off, you'd have the full $900 of your budget to put toward the car loan until that’s also paid off and you're debt free.
Pros and cons of the debt snowball method
So, what is an advantage to using the debt snowball method? Like any other debt repayment strategy, this one has its positives and negatives sides, with motivation being one its biggest advantages.
Pros of the snowball method
- It's simple and easy to follow. Because the snowball method doesn't take interest rates into account, it’s simple to determine your payment strategy. Tackling all your debts from smallest to largest is an easy concept to understand and follow.
- It's motivating. Every time you get rid of a debt, even if it is a small one, it's a win. “Those quick wins boost motivation to ensure you keep working hard at your debt repayment goals,” Woroch says.
Cons of the snowball method
- It can grow your largest debt significantly. Because this method doesn't take interest rates into account, it can potentially cost you more money over time. “That can be very costly on a bigger balance with a higher interest rate,” Woroch says. “This would mean you’ll spend more to carry the bigger debt load.”
- It can take longer to reach your goal. A direct consequence of not focusing on paying down debts with large interest rates is that it will take longer to pay off those debts than it might have otherwise. Depending on how large your last debts on the list are, the minimum payments might only cover the interest rates, not the debt itself.
When is the snowball method beneficial?
“The snowball method can be great when you need a motivational boost,” says Andrew Lokenauth, financial advisor and founder of Be Fluent In Finance. “If you're having trouble sticking to a debt plan, quick wins help build confidence.”
This method is most beneficial for people with lower total debt loads. “I think under $10-15 thousand is ideal,” Lokenauth says.
On the other hand, the snowball method might not be the best way to tackle debts over $50k or with high interest rates. “Though psychological factors matter too, with very high-interest debt over 20%, the avalanche method saves more over time,” he says.
Snowball vs avalanche method
The avalanche method and the snowball method are both popular debt repayment strategies. Whereas the snowball prioritizes paying down the smallest balance first, the avalanche method targets the debt with higher interest rates.
“While the snowball is more motivating psychologically for some, the avalanche reduces total interest paid mathematically,” Lokenauth says. “So the avalanche minimizes costs, while snowball drives emotional commitment.”
Other alternatives to the debt snowball method
If you’ve decided the debt snowball method isn't right for you, there are other alternatives to consider, even beyond the avalanche method.
- Debt consolidation loans: This method involves combining all your debts into one loan, with a lower interest rate. However, it might not be ideal if your debt load is more than half of your income, because the payments might be too high to keep up with and lenders might not approve your loan.
- Balance transfers: Ideal for consumers with credit card debt, a balance transfer consists of moving all your credit card debt to one new credit card with a lower interest rate. In some instances, it's possible to get a 0% introductory rate.
- Debt settlement programs: Also known as credit relief, these programs are offered by debt settlement companies that negotiate with creditors on your behalf to reduce the amount you owe. Then you make a single payment monthly to the relief company and they distribute payments to the creditors. The Consumer Financial Protection Bureau (CFPB) does warn consumers of the potential expensive fees and other drawbacks that come with working with a debt settlement program.
- Declaring bankruptcy: If you have too much debt that you cannot pay, you could declare bankruptcy “as an absolute last resort,” Lokenauth says. The IRS breaks down how it works, who can file for bankruptcy, and its impact on your taxes.
You can also negotiate your debt yourself, before trying anything else. “If you’re in good credit standing with your credit card company and haven’t missed any payments, give them a call and ask if you can qualify for a rate reduction,” Woroch says. “If you have kept up with on-time payments for at least six months, you should be able to get your interest rate reduced.”
If you can get that done, the next step would be finding ways to bring in extra income so you can pay off your debts while also saving money for emergencies. “Aim to save at least one month of living expenses at a minimum and put it in a high-yield online savings account to earn more back,” Woroch says. “Side hustles are also a viable option for most consumers since there are plenty of jobs you can do from home and in your spare time.”
Crush that debt
The debt snowball method is a simple and easy debt repayment strategy that prioritizes paying down smaller debts before larger ones. On one hand, you’ll enjoy the motivation of quick wins early in the process. On the other hand, it might end up taking more time to get rid of all your debt—and you might spend more money if interest rates on your largest debts are high. Before deciding to use this strategy, assess your financial situation carefully and compare the snowball method with other strategies to find your best alternative.
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