What is the Debt Snowball?
If you’re looking to pay down debt, then you’ve probably heard of the Debt Snowball. This debt repayment method was made famous by Dave Ramsey as part of his 7 Baby Steps. The Debt Snowball is used as part of Step 2. In this money short, we ask what is the debt snowball and give you a clean/concise answer.
The concept is pretty simple and easy for anyone to do. The reason this one is so popular is because it keeps your motivation going while paying down debt. Since money is so emotional for people, this is a big factor.
The Debt Snowball is purely an psychological/emotional method compared to the Debt Avalanche, but it works for many because of this simple fact. Emotions often get us into debt, but can also get us out of debt!
List Your Debts by Balance from Smallest to Largest
Write down (or use a spreadsheet) all your debts in order from the smallest balance to the largest. Do not pay attention to interest rate or even minimum monthly payment. Only balance due.
Here is a simple example to use:
| Debts listed by balance | Minimum Monthly Payment |
|---|---|
| Credit Card 1 – $750 | $45 |
| Credit Card 2 – $1,500 | $60 |
| Student Loan – $16,500 | $335 |
| Car Payment – $22,000 | $625 |
Pay Minimum Payments on All Debts
This is important because you don’t want to default on the loan or go into collections. That will destroy your credit rating and cause more stress. Pay the minimum monthly payments on all your balances besides the first one (Credit Card 1 in above table). You will be paying more on this one.
Pay Any Extra Money on the Smallest Balance Debt
I know this is the hard task, but you need to pay off this debt first and as fast as you can. You will make at least the minimum monthly payment ($45 in example table below), but you also want to add on anything extra you have on this first listed debt.
| Debts listed by balance | Minimum Monthly Payment |
|---|---|
| Credit Card 1 – $750 | $45 + $50 extra payment |
| Credit Card 2 – $1,500 | $60 |
| Student Loan – $16,500 | $335 |
| Car Payment – $22,000 | $625 |
If you have an extra $50 to pay toward that debt, you will do it. You will attack this small debt with any extra money you have. Try to keep the extra money payments as consistent as possible.
Related: 101 ways to earn extra money to pay down your debts
Roll the First Debt’s Payments to the Next Debt
Once you pay off the first (and smallest debt), you will take not only the minimum monthly payment you were making on it, but also all the extra you were paying and add it onto the next debt on the list.
So if your minimum monthly payment on the first debt was $45 and you were adding $50 on top to pay it off faster, you will add $95 on top of the next debt’s minimum monthly payment to get that debt paid off.
| Debts listed by balance | Minimum Monthly Payment |
|---|---|
| Credit Card 2 – $1,500 | $60 + $95 from first listed debt payment |
| Student Loan – $16,500 | $335 |
| Car Payment – $22,000 | $625 |
Rinse, Repeat, Roll your Snowball
The power of this method is simple. You roll over your paid off debt’s payments into the next available debt until they are all paid off. As your debts are paid off, the available money you have to pay towards them grows. Effectively creating a snowball that grows bigger as you roll down the debt mountain.
| Debts listed by balance | Minimum Monthly Payment |
|---|---|
| Car Payment – $22,000 | $625 + $430 from previous three debts |
Reap the Debt Payoff Rewards
Hopefully as your debt snowball grows, you will see the end of your debt mountain. If you are able to pay off all of the debts in the above example, you would have $1,065 in extra money you can use to save for an well deserved vacation or start investing.
No matter what method you use to pay down debt, the key is that you are at least trying to do it. Fight your debt with a giant debt snowball!