Debt Snowball

Name: Debt Snowball
Item: Debt Snowball
Author: Nathan 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.

Paying off your debts from smallest to largest is the debt snowball method.

When determining which loan to prioritize, you don’t consider its interest rate — just the balance.

Debt snowball promotes the concept of small wins. Since you see immediate results, you are likely to stay motivated and keep paying off your remaining debt.

Since you’re only paying off debt from smallest to largest, the debt snowball method may lead to paying more in interest.

You need to consider several factors — like your disposable income and self-discipline — before deciding the debt snowball method is the best strategy for you.

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

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.

Budget

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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?

Debt snowball is a strategy you can use to decrease your debts. Dave Ramsey, a radio talk show host and a personal finance author, popularized it. He says that momentum is the key to paying off debts, not calculations.

How do I use the debt snowball method?

You start by making a list of your existing debts and arranging them from the smallest balance to the largest. You then use your disposable income to pay the monthly minimums. Whatever is left is added to the smallest debt, creating a larger payment than the required minimum.

Once you've paid the smallest debt in full, that payment amount would be added to the monthly minimum of your second-smallest debt. Ideally, you repeat the process until you've cleared your debts.

Is the debt snowball method effective?

Since you start with the debt with the smallest balance, you’re more likely to see results sooner rather than later. It creates momentum for you, making it easier to continue with the rest of your debts.

What are the benefits of using the debt snowball method?

Gaining momentum is only one advantage of the debt snowball method. It’s also easy to execute, seeing as you only use the outstanding balance to determine the order of the loans — considering APRs would complicate it slightly.

It also boosts your confidence. When you see that you’ve successfully paid off one debt, paying off others no longer seems impossible.

Does using the debt snowball method come with any drawbacks?

There are two main disadvantages to using the debt snowball method — you’ll be in debt longer and you’ll end up paying more in interest in the long-term. Both of these stem from the fact that you’ll be paying for your highest debt last.

How do I know the debt snowball method is right for me?

There are two main factors that you have to consider. One is how much disposable income you have each month. This correlates with how long it’ll take you to pay off your debts. Remember, you’re after quick wins with the debt snowball method.

The second factor is self-discipline — you need to make payments consistently. If you don't apply it regularly, you won’t get the results you’re looking for.

What other debt management strategies can I explore?

If you feel that debt snowball isn’t the debt management strategy for you, explore alternatives.

Debt avalanche is the most favored option, but you can also seek the expert advice of a debt management counselor. You can also try consolidating your loans into one. Using a balance transfer card is also an option.

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.

What do you think is the biggest challenge people encounter when trying to manage debt?
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?
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?
How does the current economic conditions impact people’s ability to manage debt?

Guadalupe SanchezFounder of Budgeting in Blue

Jeff ZhouCEO & Co-Founder of Fig Loans

Barbara SchreihansFounder and Chief Executive Officer of Your Tax Coach