How To Use The Debt Snowball Method To Get Out Of Debt

Last Updated: May 3, 2019
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Dave Ramsey has created the Debt Snowball plan. As a lead personal finance author and a TV personality, Ramsey has a lot of ideas about debt. How can you the debt snowball method to get out of debt, what are the advantages and disadvantages of using it and are there good alternatives to the debt snowball?

If you have a number of loans to pay it can be difficult to take care of. No matter where those loans come from, it gets really hard for anyone.

If you have a very strict budget and you can see all of your money going to debt it gets even worse.

The snowball method is already being used to give people more momentum when they’re trying to make those payments. It takes time and effort to get started, but it’s often effective. It can be the motivation that’s needed for someone to pay off their financial problems.

What is The Snowball Method?

When we talk about this method we’re talking about paying the smallest debt first. No matter what the interest is, the smallest balance goes right off. Once it’s paid you start making that payment added to the payment on the second smallest debt. You start slowly working your way up. And each one should add on the payment of the one before it. Because debts disappear faster it provides more motivation and sense of achievement.

The momentum it provides gives you the push to keep going. Psychologically and even emotionally, this type of debt repayment can be the right way to go. It may cost more in interest than other methods, but it keeps you moving.

How The Debt Snowball Works

What you’re going to do is rank your debts from smallest to largest. From there, pay only the minimum on each account. Pay anything extra that you might have to the smallest loan. From there, start working your way slowly up the list.

Let’s take a look at a situation to use as an example. If you have 4 different debts, at $500, $200, $400 and $100 you want to put them in order. You’ll want to order them like this:

  • $100 ($15 minimum payment)
  • $200 ($20 minimum payment)
  • $400 ($20 minimum payment)
  • $500 ($30 minimum payment)

If your total available money is $120 you need to first make the minimum payment on each account. That means you put $85 toward your debt. It leaves you $35 of extra money. That means you would put that extra $35 with the $15 you need for debt 1.

Once the first debt is paid off (in month 2) you’ll put all that money ($60) toward debt 2. Then you move your way up and up until you get rid of each debt. Keep going all the way through the final debt on the list.

Pros And Cons of Using The Debt Snowball Method

What you really need to know about this method is that it’s going to make you more confident. You’re going to feel more motivated because you’re seeing some results. That’s going to keep you moving along as well.

When you get rid of that first debt you’re going to feel great. It just makes sense that you would, right? You’ll be amazed that you no longer have that debt and that you can move on. As you get rid of one debt after another you’ll start to feel more like you can get things done for the other debts.

When you start pushing a little harder you find a little extra money. You work a little extra or a little harder. You’ll start thinking twice about spending money in a number of different ways. And that’s going to make a lot of difference in the long run.

On the other hand, you’re going to have one very important con to take a look at. You’re going to spend a little more this way than you would if you spent based on the interest rate that you have on your accounts.

When you have a larger debt it can be a problem because interest charges actually compound. When you push them to the need with this method you’re going to spend a bit more. You’ll spend a bit more when you’re paying interest because you’re waiting longer to pay off this loan. If you don’t have a big income this could be a bigger problem still. It’s possible you won’t be able to pay the monthly payments.

Now, if you have a loan at 20% and a loan at 3% you may find that it’s strange to pay the minimum on the 20% interest loan just because it’s the highest balance.

On the other hand, you’ll need to pay attention to your total loan and interest rates to try and cut down interest as well.

More Debt Reducing Methods

The debt snowball is not the only debt reducing method out there. There are a couple of great alternatives you should consider as well, and understand which if them is better for you:

1. Debt Avalanche

When it comes to the debt avalanche you’re countering the biggest drawback of the snowball method. You may be able to get the debts paid off cheaper this way.

If you want to save yourself some money you can take on your highest interest rates before anything else. Because you’re getting rid of high-interest loans you’re going to pay less in total interest over time and that’s crucial. You’ll save a whole lot of money that way.

Of course, if you have a lot of money on that low-interest option you’ll be paying for a long time. For some people, this can be difficult to stick with because it takes so long to see results. On the other hand, you’ll see that you’re getting the biggest savings money-wise this way.

2. Debt Snowflake

This is about making one-time payments toward debt, that might be small but happen frequently.

We’re talking about debt snowflakes because they’re smaller and you’re only going to be saving a little bit at a time. If you’re trying to save a little you can immediately apply that directly to the debt itself. This will help you pay off debts a little faster because you can reduce amounts randomly.

Each time you make a payment it’s not going to be huge, but it’s still going to help you decrease things. Every little bit is going to help and you’ll be able to start seeing lower balances a lot. It’s going to give you close to the same results as the debt snowball as well.

With this method, you can also use one of the other forms. You can use the snowflake method with the avalanche or snowball method to get the best results. That way you’re going with whatever fits you best.

Is This Method Right For You?

You can check out a debt calculator to find out more about whether this is the right method. Whether you’re looking for the avalanche or snowball you can take a closer look here.

If you’re looking for the cheap method the avalanche is the best way to go. Just keep in mind that most people tend to abandon this method. You could find yourself struggling because you’re not seeing results. On the other hand, the snowball can keep you sticking to your plan, though you spend a bit ore.

You don’t have to pick a specific method. Use your own way and according to your own need and specifications to pay your debts in a certain order – is definitely the best.