What is the debt snowball method?
There are two popular ways for paying off debt, there’s a more traditional method called debt stacking and another method called the snowball method, recommended by financial advisor Dave Ramsey. The snowball method focuses on paying off the smallest debt balance you have first before moving onto larger ones.
It’s all about building momentum as you pay off debt, snowballing into bigger financial achievements as you go. Here’s what you need to know.
How does it work?
This method focuses on paying off your smallest debt balances first while making minimum payments on all other debts.
Once the smallest debt has been paid off you then take the money you had previously put aside to pay off your smallest debt towards your next smallest debt. The building or snowballing your repayment towards your next debt. You keep going with this method until your debts are paid off.
How to use the snowball method?
- Write down all your debts and sort them in order of smallest to largest.
- Each month moving forward, pay off the minimum on all debts. On top of this, put as much as you can towards your smallest debt. This is a good point to rethink your general budget and decide how much you can put aside for your journey to becoming debt-free
- Once you’ve paid the smallest debt off in full, roll over the money you were using for that balance onto your next smallest debt. Don’t forget to still make the monthly payments across all your other debts.
Next, repeat the process above until you are debt-free.
Advantages of the snowball method
Dave Ramsey says the psychological boost the snowball method provides is much more valuable than the financial advantages. If you start paying your largest debt first, for instance, it will take a while to pay it off and you might quickly run out of steam.
The snowball method, however, lets you tick off smaller debts quicker, giving you the mental boost and sense of achievement you need to keep moving forward. Once you start paying off your debts you might get a better handle on your finances and feel more confident in your decisions especially if you’ve had to rethink your budget.
Disadvantages of the snowball method
There’s one big disadvantage to the snowball method and that’s the potential for paying more money in interest over time than if you used another debt-repayment plan. This method focuses on the smaller amounts first which is great for so many reasons but that means your most expensive debt might get paid off last.
Despite this disadvantage, the debt snowball method is great for getting you back in control of your finances by providing a simple and achievable way to pay off your debt.
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