Understanding the Debt Snowball Method
3 Min Read | Published: 13 June 2024
Written by American Express
Paying off your debt might seem overwhelming, but the snowball method can help you take control of your finances with quick wins.
What is the debt snowfall method?
The debt snowball method is a debt repayment strategy in which you focus on paying off debts in order from smallest to largest, regardless of interest rates. You first pay off your smallest outstanding balance in full, then, when you can, move on to the next smallest debt, working your way up to the largest one, until all your accounts are paid up.
This simplified approach could accelerate your debt payoff, as you experience encouraging quick wins. It may not save you as much money on interest as other methods, but quick wins keep you motivated and help you feel a sense of accomplishment as you move closer to financial freedom.
Who is it for?
This method can be used by anyone with debt – whether that’s paying down high-interest credit card debt, or personal or student loans. It may particularly benefit those who are motivated by quick, visible wins.
How to use the snowball method to pay off debt
Here’s a breakdown of the steps you need to follow when using the snowball method:
1
Create a list
List the debts you want to pay off. Include payment information and write down the amount you owe, minimum monthly payments and due dates.
2
Set your priorities
Filter your list to put your debts in order of least to most expensive. Keep in mind that you only need to focus on monthly repayments, not taking into account interest rates.
3
Add up all the minimum monthly payments
First check the minimum amount you’d need to cover all your outstanding monthly payments, except the smallest one, as you’re going to pay this off straight away.
4
Top it up, if you can
Then, work out if you could afford to add to your minimum payment.
5
Roll over payments
Once you’ve paid off your smallest debt, use the money that you previously paid towards it, as well as the extra amount you’ve budgeted, to repay your next smallest debt.
6
Be consistent
As you keep following this strategy, the amount you put towards each debt will grow, creating a snowball effect. Repeat until you’re debt-free!
What is the difference between debt snowball and debt avalanche?
The avalanche method works similarly to the snowball method but focuses on paying off the bills with the highest interest rate first.
This will save you the most in interest repayments.
Debt snowball vs debt avalanche: which is better?
Interest rates aren’t factored in when prioritising your debts with the snowball method, as it prioritises balances. This means that the debt avalanche approach might be a better option if you’re looking to save maximum on interest.
However, the snowball method might be an effective and easy-to-follow option for people who feel motivated by ticking things off quickly.
Are there any other methods to pay off debt?
There are other strategies such as debt consolidation. A debt consolidation loan allows you to combine multiple loans in one new loan that usually has a lower interest rate. This could help simplify your monthly repayment if you’re struggling with multiple debts with high interest rates.
The most effective method to repay your debt might depend on things like your financial situation, debts, creditors and preferences. Charities such as StepChange, National Debtline and Citizens Advice offer their support free of charge. These charities could help you achieve your goals and advise you based on your personal circumstances.
Read more: What to do when you can't pay off your Credit Card?
Tips to master the debt snowball technique
Set up automatic payments
Set up automatic payments on all your accounts for the minimum monthly repayment amount to avoid late fees or other penalties.
Find out how to set up Direct Debit to pay off your Credit Card balance.
Make cutbacks
To boost your efforts, you can track and review your spending, looking for ways to free up money in your budget. For example, you could cut back on non-essential spending like dining out, cancel unused subscriptions, avoid impulse purchases or even have a clear out and sell the stuff you don’t need.
Commit to your goal
Remember that every pay-off is a small victory. Keep track of your purchases and stick to your budget to avoid more debt. Find out more on how to manage money and finances.
Build an emergency fund
Once you’re debt free, you can prioritise building an emergency fund to avoid borrowing money in case of unexpected expenses or events.
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