Millions of people have successfully used this plan to become debt-free! But what is the debt snowball method? And how does...
4 Minute ReadTopic: debt
Do you remember building snowballs in the backyard as a kid?
You probably learned that the fastest way to build a snowball was to pack some snow into a tight ball and then start rolling it through the yard. As it gained momentum, the snowball grew into something more like a snow boulder.
It was a good technique for building snowballs as a kid, and it ’s an even better method for paying off your non-mortgage debt.
We call it the debt snowball. It starts when you ’re on Baby Step 2—meaning you ’re current on all your bills and have a $1,000 starter emergency fund saved up—and it ’s perhaps the most life-changing thing you will experience in your total money makeover.
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Here ’s How the Debt Snowball Method Works
The debt snowball method is a debt reduction strategy where you pay off debts in order of smallest to largest, gaining momentum as each balance is paid off. When the smallest debt is paid in full, you roll the money you were paying on that debt into the next smallest balance.
It looks something like this:
Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.
An Example of the Debt Snowball
Say you have the following four debts:
1. $500 medical bill ($50 payment)
2. $2,500 credit card debt ($63 payment)
3. $7,000 car loan ($135 payment)
4. $10,000 student loan ($96 payment)
Using the debt snowball method, you would make the minimum payments on everything except the medical bill. For this example, let's say you have an extra $500 each month from taking a side job and cutting your expenses down to the bare minimum. You are gazelle intense.
Since you ’re paying $550 a month on the medical bill (the $50 payment plus the extra $500), that debt will be done in one month. You would then take that $550 and attack the credit card debt. You can pay $613 on the plastic (the freed-up $550 plus the $63 minimum payment). In about four months, wave bye-bye to the credit card. You ’ve paid it off!
Now punch that car note in the face to the tune of $748 a month. In 10 months, it will drive off into the sunset. Now you ’re on fire!
By the time you reach the student loan, which is your biggest debt, you can put $844 a month toward it. That means it will only last about 12 months. After that, Sallie Mae better get used to living somewhere else, because you ’ve kicked her out!
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Thanks to your hard work and sacrifice, you have paid off $20,000 of debt in only 27 months using the debt snowball method! Congratulations!
Why Does the Debt Snowball Method Work?
The debt snowball works because it is about behavior modification, not math.
In our example, if you start paying on the student loan first because it's the largest debt, you won ’t see it leave for a while. You ’ll see numbers going down on a page, but pretty soon you ’ll lose steam and stop paying extra. And you ’ll still have all your debts hanging around.
But when you ditch the small debt first, you see progress. That one debt is out of your life forever. Soon the second debt will follow, then the next. When you see the plan working, you stick to it. And when you stick to it, you will succeed in becoming debt-free!
The only time you might make an exception to the debt order is if one of the debts is to the IRS. You do not want them in your life, so it would make sense to move a tax bill up in priority. Once it ’s gone, proceed with the debt snowball like normal.
By the time you are paying the bigger debts, you have so much more cash freed up from paying off the earlier ones that it creates a "debt snowball" effect. Suddenly you ’re putting hundreds of dollars a month toward your debts instead of a few bucks here and there. You build momentum, which changes your behavior and helps you get out of debt—for good.
Ready to work your own debt snowball this year? Learn how to pay off debt, make wise spending decisions, save for the future and more in Dave Ramsey ’s class Financial Peace University. Find a class today!