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Debt Snowball

Last Updated: 5/10/2022
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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.

Download the Debt Snowball Handbook to Help You Start Paying Off Debts

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This MoneyGeek printable handbook helps you apply the debt snowball strategy to your current debts and help you pay them off. First, you'll list your debts, then organize them by the smallest to highest balances, and finally, make a plan to pay your debts each month in a step-by-step guide.

Download MoneyGeek's Debt Snowball How-To Handbook

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.

Key Takeaways

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Benefits
  • Starting with the smallest debt balance and adding in additional funds every month will help you pay it off faster. You’ll see results within a short period.
  • You gain confidence as your debt balances decrease and are paid off. These small wins are motivational, helping you sustain the behavior over the long-term.
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Drawbacks
  • Since you don’t factor in APRs, you may end up paying more interest over time. The loan with the biggest outstanding balance may also have the highest interest rate.
  • Although the process is straightforward, you may feel like it slows down as you near the end. It’s an effect of dealing with the loans with the highest balances last.
An illustration of a woman deciding if the debt snowball method is right for her.

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.

  • This is an icon

    How much of my disposable income can I commit?

    The amount of extra money you have on hand is the first thing you need to determine. The smaller it is, the longer it’ll take you to pay off even the smallest balance. What makes the debt snowball method so attractive is that you’re getting quicker results. Paying off your higher debts can appear overwhelming if it takes too much time to work on the smallest one.

    Calculating your disposable income isn’t complicated. All you need to do is subtract your fixed costs from your monthly revenue — like how much you pay for rent, food and utilities. Whatever is left can be considered disposable income.

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    Am I disciplined enough to follow a debt snowball plan?

    How much disposable income you can allot is only 50% of the success equation. The other half is ensuring you'll use it to pay off your debts. When you’re using the debt snowball method, discipline is essential.

    Regardless of which debt reduction strategy you use, you need to be disciplined enough to make regular repayments. It’s especially vital for loans that take months, or even years, to pay off.

  • This is an icon

    How much more in interest will I be paying in the long run?

    You can calculate the amount of interest you’ll end up paying overall. You can do this by adding the annual interest rate to the principal amount over the entire lifetime of your loan.

  • This is an icon

    Is it a good idea financially for me to take on this much in interest?

    You know your financial situation in depth and are likely the best person to answer this. The first three questions above can help you determine if this approach will work for you. Considering your responses and if you feel it’s a workable strategy, then the next step is to implement it.

    Don’t try to force-fit this approach to your situation if it doesn’t seem right. Remember, the best debt repayment strategy is the one that you can stick with for the long run. If you feel like the debt snowball method won’t work for you, you can consider the other methods.

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.

Expert Insights

MoneyGeek reached out to experts and industry leaders for their insights about the debt snowball method — challenges, strategies and economic conditions — to help you assess if this is the best option for your finances.

  1. What do you think is the biggest challenge people encounter when trying to manage debt?
  2. How does the debt snowball's momentum help people with their debt management? What are some strategies if people start losing motivation to keep going?
  3. When would you not recommend the debt snowball approach to someone? Would that be the right time to seek help from a financial counselor? If so, why?
  4. How does the current economic conditions impact people’s ability to manage debt?
Guadalupe Sanchez
Guadalupe Sanchez

Founder of Budgeting in Blue

Barbara Schreihans
Barbara Schreihans

Founder and Chief Executive Officer of Your Tax Coach

Jeff Zhou
Jeff Zhou

CEO & Co-Founder of Fig Loans

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 the Author


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Nathan Paulus is the director of content marketing at MoneyGeek. Nathan has been creating content for nearly 10 years and is particularly engaged in personal finance, investing, and property management. He holds a B.A. in English from the University of St. Thomas Houston.