What Is The Debt Snowball Method?

Debt snowball method: How it works

What is the debt snowball method? Like a snowball gathering momentum, the debt snowball method focuses on paying down your smallest debts first and snowballing to your largest debts.The debt snowball method is a blending of psychology and debt payments that’s designed to give you a real sense of accomplishment, encouraging you to pay off debts more efficiently and easily.

Let’s say you have three credit cards, a car loan and a personal loan. Line them up from smallest to largest balance, ignoring their interest rates. Choose your smallest balance and figure out how much you can afford to put toward the balance this month above the minimum payment.

While focusing on paying down the smallest debt, you’ll continue making  minimum payments on all other debts.

Once you have paid off the smallest debt, you will take the payment you’ve been applying to your smallest debt and apply it to your second lowest debt, including the minimum payment you’ve already been paying on that second balance.

When you have paid off the second debt, you will take the payment you’ve been applying to your first debt, the minimum payment from your second debt and apply them to the third debt, including the minimum payment for the third debt. Your payment sizes will increase with each debt, like a snowball rolling down a hill.

Why does the debt snowball method work?

If you were to keep throwing money at all of your debts, psychologically, you might feel like you’re treading water but never getting anywhere. Human beings need to feel like they’re making headway and accomplishing things in order to keep the momentum going. If you feel your progress is paying off, that can keep you moving ahead. So, by paying off the smallest debt first, you’re building the drive to get all your debts paid off.

An example of the debt snowball method in action

1.Credit card A:  $580                        Minimum payment: $27

2.Credit card B:  $2,250                         Minimum payment: $125

3. Credit card C:  $3,325                         Minimum payment: $200

Using the above example, look at your total monthly budget and figure out the minimum payments for all three credit cards. You decide that you can afford to pay $300 toward your smallest debt balance. So, including the minimum payment, you’ll pay $327 toward clearing credit card A’s debt, until it is paid off, and you’ll make the minimum payments of $125 and $200 on credit cards B and C, respectively. When credit card A is paid off, you’ll take the $327 you were applying to credit card A and apply it to credit card B, including the minimum payment of $125, for a total of $452 a month until credit card B is paid off. When credit card B is paid off, you’ll add the $452 a month you were paying on credit card B to the minimum payment on credit card C for a total of $652 a month toward credit card C. Before you know it, all your debt is gone, and you’ll be able to afford to take

yourself out to dinner to celebrate.

Advantages of the debt snowball method

People tend to appreciate instant gratification, and it feels like that happens sooner and more often with the debt snowball method. The snowball effect in debt repayment is all about feeding ourselves quick accomplishments in succession that make us feel like we are making more progress.

Disadvantages of the debt snowball method

With the debt snowball approach, you’ll likely pay more in interest over time than you would with another approach. Paying off your highest interest debt first and working toward your lowest interest debt is known as the debt avalanche method. While this may sound like the most efficient method of paying off your debt, the debt avalanche approach doesn’t take into consideration the psychology of human beings who need to see quick progress, like the debt snowball method does.