How to Create a Debt Snowball Strategy That Works

Feeling overwhelmed by debt? You're not alone. The sheer volume of bills and interest charges can feel incredibly daunting. But there’s a proven strategy that can help you take control and start seeing real progress: the debt snowball method.

Published: 2020-02-28

What is the Debt Snowball Method?

The debt snowball method, popularized by Dave Ramsey, isn't about tackling the highest interest debts first. Instead, it prioritizes paying off your debts starting with the smallest balances, regardless of interest rates. This creates a psychological boost that’s crucial for staying motivated.

Here's a Step-by-Step Guide:

List Your Debts: Make a comprehensive list of all your debts. Include:
- Credit cards
- Student loans
- Personal loans
- Medical bills
- Any other outstanding debts
Order by Size: List your debts from smallest balance to largest balance. Don't worry about interest rates at this stage.
Minimum Payments: Make the minimum payments on all your debts.
Attack the Smallest Debt: Throw every extra dollar you can find at the smallest balance. This is your “snowball.” The goal is to pay it off as quickly as possible.
Roll the Snowball: Once the smallest debt is gone, take the money you were using to pay it off (including the minimum payment) and apply it to the next smallest debt. This "rolled over" payment is your new snowball!
Repeat: Continue this process, relentlessly focusing on the next smallest debt until all your debts are eliminated.

Example:

Let's say you have these debts:

Credit Card 1: $500 balance
Credit Card 2: $1,000 balance
Student Loan: $5,000 balance

Using the debt snowball, you'd:

Pay the minimum on all debts.
Attack Credit Card 1 ($500) with every extra dollar.
Once Credit Card 1 is paid off, roll the $500 (plus minimum payment) onto Credit Card 2.
Continue until Credit Card 2 is paid off, then move to the student loan.

Why Does the Debt Snowball Work?

Motivation: Seeing quick wins is incredibly motivating. Eliminating smaller debts provides a tangible sense of accomplishment.
Psychological Boost: The rapid progress can fuel your commitment and help you stick to your debt repayment plan.
Simple and Easy to Understand: It’s a straightforward method that doesn't require complex calculations.

Important Considerations:

Don’t Ignore High-Interest Debts: While the snowball method focuses on motivation, you should still be mindful of interest rates. After the snowball is complete, consider consolidating high-interest debts or exploring lower interest options.
Budgeting is Key: This strategy requires a disciplined budget. Track your income and expenses to identify areas where you can cut back and free up extra cash.
Stay Consistent: Consistency is crucial. Make debt repayment a priority and stick to your plan.

Resources:

Dave Ramsey’s website: https://www.daveramsey.com/

Do you struggle with debt?