Debt Snowball

ByNathan Paulus

Updated: November 25, 2022

ByNathan Paulus

Updated: November 25, 2022

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What Is the Debt Snowball Method?

If paying off your debt quickly is a top goal then the debt snowball method may be a good strategy for your finances. Utilizing this method, you pay off debt in ascending order — starting with your lowest balance and working toward your highest.

By starting with your smallest debt, it can be paid in full quickly and then you can start paying on your second-smallest debt balance, repeating the process until your debt has been eliminated. The idea is to gain momentum through small wins. Since you see tangible results, it keeps you motivated to continue paying off your remaining balances.

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Understanding Debt Snowball

The debt snowball method is a form of accelerated debt repayment where your payment strategy aims to decrease your loans’ outstanding balances faster. Dave Ramsey, a radio talk show host and personal finance author, popularized the term.

With the debt snowball method, you pay off your debts in order of their balances, regardless of their interest rate. The objective is to pay off the smallest first, then work your way up through your higher balances. As the name implies, the process creates a “snowballing” effect, allowing you to gain momentum as you pay one debt after another.

You can use debt snowball for various types of debt, but some loan structures do not encourage it. You may find yourself having to pay penalties or fines if you attempt it.

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How to Apply Debt Snowball

One advantage of the debt snowball method is that it’s easy to implement. The entire process only includes six steps that you repeat until your debt balance reaches zero.

1
Budget

Create a budget that includes your monthly expenses and highlights your additional funds. This is your disposable income.

2
List debts

Detail all your current debts, excluding your mortgage. Then, arrange them in order based on their outstanding balances. You don’t need to consider interest rates during this process.

3
Make minimum payments

Allocate a portion of your disposable income to each of your debts. Make sure it’s just enough to cover the minimum payment required.

4
Pay more on the smallest debt

With the remainder of your disposable income, add it to the smallest debt payment. Repeat this each month until it is paid in full.

5
Start on the next debt

Once your lowest debt has been paid, your monthly balance should increase. You can roll over that additional income to the second-smallest debt balance. Remember, you still have to continue paying the minimum for the rest of your loans.

6
Repeat the steps

Repeat this process for each remaining debt, working your way up to the one with the highest outstanding balance.

Although the process sounds straightforward, putting the debt snowball method into practice may be challenging. While there are clear benefits, there are also drawbacks to consider before implementing it as your strategy.

Debt Snowball in Practice

While it’s not hard to set up the debt snowball method, you should understand how it applies to a real-life scenario before you start using it. The table below helps illustrate the small-to-large debts you may have in a month, taking into consideration minimum payments and interest.

Debt type
Balance
Annual Percentage Rate (APR)
Monthly Minimum

Student Loan

$8,000

5%

$100

Auto Loan

$15,000

4%

$400

Credit Card

$17,000

11%

$300

Using the figures from the table, learn what happens when the debt snowball method is applied. The steps and examples below will showcase how the debt reduction process works.

1
Review your budget

After your fixed expenses have been paid, you have $1,000 of income remaining. This can now be applied to your loans.

2
Identify the lowest debt

You have two loans — student and auto — and one credit card balance. The table shows that the debt with the smallest balance is your student loan at $8,000. Remember that you don’t factor in the interest rate when using the debt snowball method.

3
Pay your minimums

Taking the $1,000, you apply $100 to your student loan, $300 to your credit card and $400 to your auto loan. This meets the minimum required monthly payment on each debt.

4
Make an additional payment

After paying the minimums, you have $200 remaining. You can add this to your student loan payment, bringing it to a total of $300.

5
Move on to the next payment

After several months of paying extra on the smallest debt, your student loan is paid in full. At this point, you can add the $300 that had previously been allocated to your student loan to the $400 monthly auto loan minimum payment, which was the second-lowest balance from your list of debts. Your new monthly payment for it is now $700.

6
Continue with the next debt

Once you’ve paid off your auto loan, you can focus on paying off your credit card balance. Now, you can add the $700 from your previous car loan to your credit card’s monthly payment. This makes your new monthly payment $1,000.

7
Check in on the process

If you’re completing the debt snowball method correctly, your $1,000 will pay off your credit card balance. At this point, your pre-existing debt has been paid in full.

Trying to pay off multiple loans can appear daunting, but it doesn’t have to be. The debt snowball method is a straightforward approach to decrease your debt rapidly. It's easy to execute if you have the necessary information, such as your outstanding balances and monthly minimums.

Benefits and Drawbacks of the Debt Snowball Strategy

The debt snowball method is an excellent way to manage and pay off your debt. That said, it’s not an end-all, be-all approach to paying off your loans. As with any strategy, it comes with its advantages and disadvantages.

Ultimately, you’ll be the best person to decide whether this approach works for you or not. We’ve highlighted some of the benefits and drawbacks of the debt snowball method to help you assess if this is a good strategy for you.

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Is Debt Snowball Right For You?

The debt snowball method can be an effective way to manage your existing loans. However, as with all debt reduction strategies, it may work better for some individuals more than others. Before you dive headfirst into the process, there are some things you should consider. Understanding your present situation can help you determine whether it's the right approach for you.

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Alternatives to Debt Snowball

The debt snowball method isn’t the only way to repay your debts. There are several other strategies that may fit your situation better.

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4 ALTERNATIVE STRATEGIES

1. Debt avalanche. The avalanche strategy is probably the most popular alternative to debt snowball. It requires you to pay off the debt with the highest APR first. It may be your best option if you want to save on interest in the long-term.

2. Debt consolidation loan. This method allows you to combine two or more debts into a single, larger balance. It provides a simple way of paying off loans since you only have to make one monthly payment instead of several smaller ones.

3. Debt management (with a counselor). If you’ve tried several debt management strategies on your own and they haven’t worked, then perhaps it’s time to ask for additional help. A debt counselor can give you personalized advice on managing your finances and creating a debt management plan for you.

4. Balance transfer credit cards. If you’re using multiple credit cards, each with its outstanding balances, you may consider consolidating all these under one balance transfer card. More paying a single statement per month, most balance transfer cards also help you save on interest fees.

Debt Snowball FAQs

Not everyone is familiar with the concept of debt snowball. The following commonly asked questions can help clarify what this debt reduction strategy involves.

What is a debt snowball?
How do I use the debt snowball method?
Is the debt snowball method effective?
What are the benefits of using the debt snowball method?
Does using the debt snowball method come with any drawbacks?
How do I know the debt snowball method is right for me?
What other debt management strategies can I explore?
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Related Content

Understanding debt management and strategies can help you make educated decisions when it comes to your finances. Learn more in the following resources and find solutions that fit your situation.

About Nathan Paulus


Nathan Paulus headshot

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.