Are you struggling to pay off debt? If so, the snowball method of debt repayment may be just what you need. Developed by popular finance guru Dave Ramsey, the snowball method is a strategy for intentionally paying off your debts in order from smallest to largest. This approach can help motivate and empower you as you make progress toward becoming debt-free.
What Is the Snowball Method?
The snowball method of debt repayment involves paying off your debts in order from smallest to largest balance, regardless of the interest rate. For example, if you have three debt accounts with balances of $500, $2,000, and $10,000 respectively, you will pay off the first account with a balance of $500 before tackling the larger debts.
You can think of it like a snowball rolling down a hill that starts small but then gains momentum as it goes. As you pay off the smaller debts, you can take the money that was going toward those and use it to attack your larger balances.
Why Is the Snowball Method Effective?
Psychology plays an important role in the effectiveness of the snowball method. It can be very difficult to stay motivated and keep going when paying off debt. By focusing on the smaller, more manageable debts first, you get a sense of accomplishment as you cross them off your list. This helps you stay motivated to keep going and can provide you with a sense of hope that you can become debt-free.
The snowball method can also help you stay organized. You will know exactly which debts need to be paid off first, the amount that needs to be paid and when it’s due, as well as what your budget should look like now and in the future. This organization makes paying off debt less overwhelming and more manageable.
How to Get Started with the Snowball Method
Getting started with the snowball method is fairly simple. First, list out all of your debts in order from smallest balance to largest. You should include all forms of debt except for your mortgage. This includes credit cards, student loans, car payments, medical bills, and any other debts that have a balance.
Next, calculate how much extra money you have left after paying your basic living expenses (rent/mortgage payments, utilities, groceries) each month. This will be the amount that you can use to pay off your debt. Once you know this number, begin putting it toward paying off the smallest debt that you listed first. You should continue making the minimum payments on the other debts while you focus on paying off the smallest one.
Continuing to Make Progress With the Snowball Method
Once you have successfully paid off your smallest debt, take all of the money that was going toward it and add it to whatever you are already putting toward your next smallest debt.
For instance, if you were putting $300 a month toward your smallest debt and paying a $50 minimum payment on the next-smallest debt, you’ll now be paying $350 a month toward that one. All of the extra money you have will now go toward this debt until it is paid off as well.
Once that second debt is paid off, you’ll put that $350 a month toward the third debt in line, and so forth. This is the “snowballing” effect, where you keep taking all of the money you have been paying toward debts and roll it into the next debt until all are paid off.
Alternatives to the Snowball Method
Of course, the snowball method isn’t the only way to pay off debt. You could always opt for a different repayment strategy, such as the avalanche method or using a loan consolidation service.
The avalanche method involves attacking your highest-interest debts first in order to save money on interest charges over time. This may be a better choice if you have a lot of high-interest debt that is eating away at your budget.
Using a loan consolidation service entails taking out one large loan to pay off all of your smaller debts. This simplifies the repayment process because you only have one loan to focus on. However, it can also increase the amount of time it takes to pay off your debt, as well as the amount of money you end up paying in interest.
Is the Snowball Method Right for You?
The snowball method is a great option for people who are motivated by seeing progress and crossing items off a list. It can be easier to stay on track and remain focused on paying off debt when you have smaller goals that come with tangible rewards along the way.
This is ideal for people who need that extra bit of motivation to stay the course and eventually become debt-free. People with executive functioning issues, such as attention deficit hyperactivity disorder (ADHD), may also find the snowball method helpful since it provides an organized structure and can help keep them on track.
That said, debt repayment is a highly personal journey. If you find yourself more motivated by the numbers and want to make the biggest dent possible in your debt, then you may be better off paying off your highest-interest debts first or pursuing a debt consolidation loan.
If you’re considering using the snowball method to pay off your debts, make sure to do thorough research and talk with a financial advisor before making any decisions. They can help you assess your financial situation and determine which repayment method is best for you. With the right approach, you can be on your way to becoming debt-free in no time.