Debt Snowball Method: How it Works to Pay Off Debt

The debt snowball method is a strategy for paying off your debts by paying down the smallest balance first and working progressively to paying off the largest amount. The debt snowball method can keep you motivated to continue paring down your debt.

However, you could potentially save more in interest or find other advantages with other strategies, including by using one of the best debt relief companies. Learn how to weigh the pros and cons to find the best debt payment strategy for you.

How the Debt Snowball Method Works

The debt snowball method was made popular by Dave Ramsey, the host of a personal finance radio show and a best-selling author. It starts by identifying the debts you want to pay off. For many people, this may not include a mortgage because a mortgage typically has a lower interest rate than other forms of debt. So, some people prefer to keep that debt and use the extra funds toward investment to earn a higher rate of return.

To use the snowball method to pay off your debts, use these five key steps:

1. List the debts you want to pay down in order of their balances, from smallest to largest.
2. Pay all the minimum payments.
3. Put any extra money toward the smallest debt.
4. After the smallest debt has been paid off, put your extra money toward the next smallest debt.
5. Continue to allot your extra payments only toward the smallest debt until all of your debts have been paid.

Unlike with some other debt repayment methods, interest rates are not a factor in how you prioritize your debts with the debt snowball method. So, this strategy may not be ideal if you are trying to save the most in interest.

However, for some people, the debt snowball method can be more effective because of the psychological benefits of achieving a "win" each time a debt is paid in full. This can encourage you to continue putting your extra money toward your debt.

Pros and Cons of the Debt Snowball Method

Like many other debt repayment strategies, the debt snowball method has both advantages and disadvantages.

Pros Explained

• Can be motivating: Paying off five debts can seem more manageable if the list is quickly whittled down to a single debt by paying off the smaller debts first. The debtor might get frustrated and quit the repayment plan if the highest-interest debt was one of the largest debts and had to be repaid at the beginning of the plan.
• Easy to follow: The debt snowball method is easy to implement, since it doesn't require you to compare annual percentage rates (APRs) for different debts. You simply need to know the balance of each debt to rank them in priority.

Cons Explained

• May not save maximum interest: The debt snowball method is not necessarily the best choice for saving money on interest. Because you're prioritizing balances over interest rates and only making minimum payments on debts that are low on the list, you could end up paying considerably more in interest over time.
• Can take longer: Since the debt snowball method focuses on repaying debts according to their balances, and can allow large, high-interest debts to grow even bigger, it may take you longer to pay off your total debt.

Example of the Debt Snowball Method

Here's an example of how a debt snowball works. Let's say you can afford to put $1,000 every month toward paying off your three sources of debt:

• $2,000 in credit card debt (with a minimum monthly payment of $50)
• $5,000 in auto loan debt (with a minimum monthly payment of $300)
• $30,000 in student loan debt (with a minimum monthly payment of $400)

Using the snowball method of debt repayment, you would need a total of $700 to cover the minimum monthly payments on the auto and student loans.

That leaves you with $300 extra to put toward your debt. You'd start with the credit card debt because that is the smallest amount.

Once the credit card debt has been completely paid off, the extra payment can go toward paring down the second-largest debt: the auto loan.

After making the $400 minimum monthly payment on the student loan, you can put $600 a month toward the auto loan. Once the auto loan is paid off, the full $1,000 can go toward the student loan until it, too, is paid off and you are debt-free.

You can see that the monthly payments amounts you make toward you debt "snowball" into larger amounts as you pay down each debt.

How Is the Debt Snowball Motivating?

The debt snowball method can be motivating because you can see a result of a debt eliminated faster. That can encourage you to continue your behavior and work toward the next debt to see another result sooner.

Seeing a debt paid down can be encouraging, so you may be likely to stick with the debt snowball method. The debt snowball method is also an easy strategy to use, which can help borrowers continue using it to pay off their debts. Keep in mind that this strategy may not save as much in interest as other debt repayment strategies, like the debt avalanche.

Debt Snowball vs. Debt Avalanche

The debt snowball method assumes that you'll receive gratification from paying off a small debt so you will be motivated to keeping making extra payments until you pay off larger debts.

That may be true for many people. However, paying off debts with the highest interest rates first—known as the debt avalanche method—will save you the most in total interest. It should also reduce total debt load faster. That's because your high-interest debts will be racking up even more interest while you're just paying the minimum due on them.

In some cases, your smallest debts may also be the ones with the highest interest rates. For example your credit card debt may be your smallest balance and the debt with the highest interest rate. Or, your student loan may be your largest debt and carry the lowest interest rate.

In that case, you don't have to choose between the debt snowball and debt avalanche methods. You can practice both at the same time.

Frequently Asked Questions (FAQs)

The Bottom Line

The debt snowball method is one way to get out of debt. It may not save you the most money in the long run, compared to other methods, but it could give you some extra motivation to stay on track. Other strategies for paying down debt include debt consolidation and the debt avalanche method in which you pay off the debt with the highest interest rates first. The right debt repayment plan for you will depend on several factors about your personal financial situation and goals.