Start Small: How to Use the Debt Snowball Method
6 MIN READ
Published September 27, 2023 | Updated October 27, 2023
There’s more than one way to pay off your debt. If you have debts from multiple sources and aren’t sure how to prioritize them, consider the debt snowball method. With this method, you start by paying off your lowest balance first. Once you pay it off, use the money that is freed up to pay the next one. This debt payoff strategy can provide you with a structure to repay your debts, but you end up paying more in interest charges if your larger debts have higher interest rates.
What is the Debt Snowball Method?
The debt snowball method focuses on paying off your smallest debts first while continuing to make minimum payments on your other debts. Once the debt is paid off, you use those funds to pay off your next-smallest balance. You’ll essentially be snowballing your debt repayment towards the next balance. You’ll repeat this cycle until you pay off all your debt. You can use a debt payoff calculator to determine how much to pay each month and when you’ll be able to clear off your debts.
Seeing the results of actually clearing off your debts can be a great motivator to keep going. The method was first popularized by Dave Ramsey, a personal finance author, and countless people around the world have used it since then.
How Does It Work?
The debt snowball method can help you gain momentum as you pay off each debt balance to get out of debt. Here’s a closer look at how this method works:
- Start by making a list of all your debts, along with the amount you owe on each one and monthly minimum payments.
- Prioritize them in order of smallest to largest.
- Pick the smallest balance and pay as much as you can on it each month.
- Continue making minimum payments on all other debts.
- Once you pay it off, repeat the same process with the next-smallest debt on your list.
- Repeat until you’ve paid off all your debts.
The debt repayment method does not take interest rates into account, and you may end up paying a lot of interest over time. But, the key to success with this payoff plan is to be consistent and continue to pay off your smallest debt as quickly as possible. This method focuses on generating excitement and motivation so that you’ll keep going until you reach the finish line.
Example of the Debt Snowball Method
An easy way to understand how to pay off debt with the debt snowball method is with an example. Let’s say you have four different debts:
- Credit card debt: The balance is $3,000, and the minimum payment is $100.
- Medical debt: The balance is $2,000, and the minimum payment is $150.
- Car loan: The balance is $7,000, and the minimum payment is $210.
- Personal loan: The balance is $8,000, and the minimum payment is $125.
The medical bill is your smallest debt in this example. Using the debt snowball method, you’ll start using all your extra money towards that debt payment. Meanwhile, you’ll make minimum monthly payments on all other debts. Once you pay off the medical debt, you’ll move on to your credit card. Roll over the money you were using to pay off your medical debt along with extra cash into your credit.
Once both of those are paid off, you start focusing on the auto loan and then the personal loan. At the end of the process, you’ll be completely debt-free.
- You’ll receive a psychological boost when you see your debt disappearing.
- You’ll be motivated to stick to the repayment plan until the end.
- You may be able to pay off your debts faster since you’ll be using all your extra cash to pay off your debt.
- As you continue to pay off your debts, your credit score may improve as your credit utilization rate goes down.
Weigh the advantages listed above against the disadvantages of the debt snowball method to determine if it’s the right solution for you:
- You may end up paying more in interest charges over time because this method does not prioritize debts based on interest rates.
- You may neglect higher-interest debts such as credit cards while focusing on other debts, and your balances may increase.
- If you fail to make minimum payments on all your debts, you may end up paying late fees, and your credit score may be damaged.
Snowball vs. Avalanche Method
Another common debt repayment strategy is the debt avalanche method. With debt avalanche, you’ll focus on paying down debt with the highest APRs first. You’ll continue making minimum payments towards the other debts. Once you pay off that debt, you’ll use that money to pay off the debt with the next highest interest rate. The key difference between the snowball vs. avalanche method is that you’ll be able to save more in interest with the debt avalanche method. Another difference is that it may take you longer to pay off debts with the debt avalanche method. If your priority is to save money, debt avalanche may be the better option for you.
6 Tips for Using the Debt Snowball Method
If you’re planning to use the debt snowball method to pay off your debts, consider implementing some of these tips and strategies to boost your efforts and pay off your debts faster:
- Create a budget. Whether you use the 50/30/20 budget or the zero-based budget, your goal is to make a plan that will allow you to throw as much as you can toward your debts each month.
- List all your debts in order of their balance. You can create a debt snowball spreadsheet to organize and track your debts and progress on each.
- Reduce expenses wherever possible so you can have more money to pay down your debts.
- Increase your income. Consider a side hustle, overtime, or another method to bring in more money that can be used for making extra payments on your debts.
- Most importantly, adjust the plan to fit your financial situation. For example, if you have an outstanding high-interest debt like a payday loan or title loan, prioritize paying that off first instead of following the debt snowball method.
- Build an emergency fund alongside debt repayment so an unexpected expense doesn’t derail your debt snowball plan.
Brad Reichert, debt expert and Founder and Managing Director of Reichert Asset Management LLC, offers more advice about what to do when you pay off an outstanding account. “When you pay off a credit card or other revolving credit line, make sure to keep the account open and at a zero balance while you’re paying down the next largest account balance,” Reichert explains. “This way, your credit (FICO) score will improve as your credit utilization rate (CUR) goes down.”
“Your credit utilization rate is calculated by taking the total of all of your revolving credit and credit card balances and dividing that number by your total credit lines available to you for use,” adds Reichert. “If you close one of these accounts after you pay them off, the denominator in this equation goes down and actually raises your utilization ratio! Once you’ve paid off all of your debts, and every account shows a zero balance, you can always decide to close whichever account(s) you don’t want to keep open,” Reichert shares.
Is the Debt Snowball Method Right for You?
The debt snowball method may be right for you if you lack motivation and have failed to stick to a debt reduction strategy in the past. The quick wins you’ll see with this method may encourage you to continue paying off your debts. The key to success is consistency. If you think that achieving these smaller goals will help you stick to the plan, it’s the right option for you.
The Bottom Line on the Debt Snowball Method
The debt snowball is a good way to start paying down your debts and get the motivation you need to stay on track. But before you decide if it’s the right option for you, consider alternatives. There are several different ways to get out of debt, such as debt consolidation, debt management, and debt settlement. If you’re in doubt, consider speaking to a credit counselor. A counselor can take a look at your financial situation, debts, income, and budget and suggest which debt relief option may be right for you.