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If you’ve ever made a snowball, you know you start with a small amount of snow and pack it until it’s a compact ball. Then, to make it bigger, you lay it down on the ground and roll it along the snow. As it rolls, it collects more and more snow. And it gets bigger and bigger.
Well, the same technique can be applied to pay off your debt. As your debt snowball collects more snow and gets bigger, you’ll be able to pay off your debt quicker.
Let me show you how it works.
How Does the Debt Snowball Work?
The Debt Snowball method is a strategy for paying down your debts made popular by Dave Ramsey and his Baby Steps.
Once you have $1,000 saved in an emergency fund, you turn to Baby Step 2 where you pay off all your non-mortgage debts in order from smallest to largest. Then, when you pay off the smallest debt, you take the money you were paying towards that loan and roll it over towards the next smallest debt.
Your debt snowball will get bigger each time you pay off one of your debts and roll that payment into the next. Which means you’ll build momentum, pay off the next debt faster, and stay motivated until all your debts are gone.
The Debt Snowball in 5 Easy Steps
Step 1 - List all of your non-mortgage debts from smallest to largest.
Non-mortgage debt includes credit card debt, car loans, personal loans, student loans, loans from your retirement account, medical debt, etc.
Step 2 - Pay minimum payments on all your debts each month.
Step 3 - Put all extra money towards the smallest debt.
To help you pay down your debt faster, put all extra money towards your smallest debt. (This is also known as snowflaking.) Examples of where this extra money can come from include:
- Income from taking surveys
- Tax refund
- Money left over at the end of the month (i.e., you budgeted $400 to groceries but only spent $375, giving you $25 left over)
- Find ways to trim expenses
- Finding ways to earn extra money
Step 4 - Once smallest debt is paid off, take minimum payment plus all extra money and put it towards your next smallest debt.
Step 5 - Repeat until all debts are paid in full!
The Debt Snowball in Action
Say you have the following debts:
- $7,900 Car Loan ($100 monthly payment)
- $14,000 Student Loan ($100 monthly payment
- $3,500 Credit Card #1 ($100 monthly payment)
- $1,000 Credit Card #2 ($50 monthly payment
[Note: For the purpose of this example, we will ignore interest.]
First, you’ll want to list them in order, from smallest to largest.
Then you’ll pay the minimum payment each month on each loan. But you’ll put all extra money towards the smallest loan...in this case “Credit Card #2”.
For this example, let’s say you are able to put an extra $150 towards your loans each month. So, your monthly payment plan would look like this:
You’ll have Credit Card #2 paid off in 5 months (instead of 20 months). Starting in Month 6, you’ll take the $200 you were paying towards Credit Card #2 and add it to the $100 you are paying towards Credit Card #1. So, your monthly payment plan would look like this:
You’ll have Credit Card #1 paid off in 10 months (instead of 30 months). Then, starting in Month 16, you’ll add the $300 you were paying towards Credit Card #1 and add it to the $100 you are paying towards the Car loan. So, now your monthly payment plan would look like this:
With paying $400 towards your car loan, you’ll have it paid off in 16 months (instead of 64 months). Then, starting in Month 33, you’ll take the $400 you were paying towards the Car loan and add it to the $100 you are putting towards your Student loan. Here’s what your monthly payment plan would look like this:
With your payment of $500 towards the Student loan, you’ll have it paid off in 22 months (instead of 109 months). This will allow you to be fully debt free in 54 months (instead of 223 months).
Is the Debt Snowball Right for You?
Increased motivation. By focusing on your smallest debt, you’ll be able to pay it off quickly. This small victory will keep you motivated and more likely to stick with your payoff plan. Studies support this correlation between paying the smallest balance first and eliminating debt completely.
“Knock out a small debt first so you get a quick win. Momentum is key.” - Dave Ramsey
May pay more in long run. The Debt Snowball completely ignores your debts’ interest rates. Meaning, by paying on your smallest debt first, you may be paying off debts with lower interest rates before debts with higher interest rates.
Those larger, higher interest loans will continue accruing interest while you’re only paying the minimums on them. This means it’ll take longer to pay it off and cause you to pay more in interest.
As you can see, using the Debt Snowball can help you reach your debt-free goal faster. And keep you motivated so that you stick with it. But it may cause you to pay more if your larger balances are higher in interest than your smaller balances.
Only you can decide what is more important to you.
Which is more important to you? Seeing progress quickly and getting small victories? Or saving money on interest?