The Snowball Method: How to Use it to Pay Off Debt

When someone is ready to get out of debt, the debt snowball method, just like debt consolidation may help them get there. The debt snowball method is a great option if the borrower can stay motivated throughout their debt payoff journey. Put simply; the debt snowball method is when an individual tackles their debts in order, paying them off from smallest to largest.

How the Debt Snowball Method Works

With the debt snowball method, borrowers pay off their smallest debt first. Then, the payments they made toward it are now available to pay down the next smallest debt. This cycle is repeated until the person is debt free. This method lets a person build momentum or “snowball” their payments as they repay each debt. Anyone who wants to use the debt snowball method should follow these steps:

1.   List Debts from Smallest to Largest

This list should include all the borrower’s debts, except a mortgage. For example, these debts may be personal loans, payday loans, student loans, and car loans. The lists must be ordered from the smallest balance to the largest balance.

2.   Focus on Paying Off the Smallest Debt First

Next, the borrower should put as much extra money as possible toward paying the debt with the smallest balance. At the same time, the borrower must continue paying at least the minimum monthly payment due on all their other debts.

3.   Repeat with the Next Smallest Debt

Once the borrower has paid off the smallest debt, it’s time to move on to the next smallest debt. Again, the borrower must continue paying at least the minimum monthly payment due on all their other debts.

4.   Continue the Process Until All Debts are Repaid

The borrower won’t be done with the debt snowball method until all their debts have been paid off. It’s important to keep in mind that this process might take some time, especially if there are many large debts.

Pros and Cons of the Debt Snowball Method

The most significant advantage of the debt snowball method is that borrowers gain momentum and stay motivated as they see their debts drop. Even if they’re overwhelmed with debt they can’t go wrong with the debt snowball because every month of progress brings positive reinforcement,.

As for drawbacks, there is a significant one: the debt snowball method doesn’t consider interest rates. Since it focuses on the size of the balances owed, it may cost a borrower more in interest over time until the bigger debts which may be subject to higher APRs get paid off.

Debt Snowball vs. Debt Avalanche

The debt avalanche method is another do-it-yourself debt payoff strategy. While the debt snowball method prioritizes paying off the smallest debts first, the debt avalanche method prioritizes paying off debts with the highest interest rates. And like the debt snowball method, the borrower must continue making minimum monthly payments on all other outstanding debts.

Once the borrower pays off the debt with the highest interest rate, they’ll move on to the debt with the second highest interest rate and continue this process until they’re debt free. The debt avalanche makes the most sense if the borrower’s main goal is to save as much as possible in interest charges.

The Bottom Line

The debt snowball method can help make paying off debts one by one more manageable and less overwhelming. It’s a good option for borrowers who want to celebrate small wins and keep their motivation throughout their entire debt payoff journey.

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