What Is The Debt Snowball Method?

If you are looking at how you can work your way out of debt, then one of the common methods is called the debt snowball method. It can sometimes be hard to build up steam when tackling debt and so having a plan in place can help keep you incentivized. In this article, we will explain and answer the question “what is the debt snowball method”.

What is the debt snowball method?

The debt snowball method is a debt reduction strategy where you tackle and pay off your debts in the order of the smallest to the largest debts. Each debt you pay off gives you momentum, powering you toward paying off the next debt.

Once you have paid off the smallest debt in full, you then roll the minimum payments you were making towards that debt and direct it to the next smallest debt payment.

How does the debt snowball work?

There are 5 simple steps to the debt snowball method. Once you are in the flow of the snowball can give you an rewarding feeling as you see the accounts close and your debt reduced to full paid.

Here are the 5 simple steps to the debt snowball:

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  1.  List all your debts from the smallest to largest – regardless of interest rates
  2.  Set up your debts to pay the minimum balance except your smallest debt
  3. Pay as much as possible into your smallest debt
  4.  Once the smallest is paid off, then roll your minimum payment into the next debt
  5. Repeat till debt free

While there are 5 simple steps to this method, it depends on how many debts you have and the size of each.

The great thing about the debt snowball method is that as you pay off the smallest debt, you’re accounts become easier to manage and a release of stress from multiple companies reminding you of your debts.

An example of the debt snowball

The easiest way to learn this method is by working through a real life example. For this example we will take 3 simple debts that most would have come across – personal loan, credit card debt & car loan.

  1. £500 personal loan – £50 minimum payment
  2. £2,500 credit card debt – £63 minimum payment
  3. £7000 car loan – £135 minimum payment

For the example we will assume you have a spare £500 a month which you can allocate towards your debts.

With the smallest loan first, the personal loan, you would be able to pay off the debt within one month if you apply your spare £500. Reducing your total amount of loans down to 2 and freeing up £550 per month.

Now you can attack the credit card debt. Your £550 coupled with the £63 minimum payment means that in about 4 months you would have tackled and paid off the credit card debt.

Now you can roll all of this towards your last and largest debt, your car loan. Now with the personal loan and credit card paid, you have a total of £748 per month to tackle the car loan. With this sum you should be able to pay off the car loan in 10 months.

Using the debt snowball method you would have spent 16 months paying off a sum of £10,000 worth of loans, an impressive feat for anyone.

What are the advantages of the debt snowball method?

The main advantage of the debt snowball method is that by fully paying off the smallest debt first helps your psychology going forward.

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The psychological reward for paying off a debt should not be underestimated. When you are seeing your debts clearing one by one it can further push your motivation to continue paying off your debts. Even if you pay off a small balance, your confidence will grow significantly.

This easy debt payment method can help you get a grasp of your financials and help reduce your stress by taking it by one step at a time.

What are the disadvantages of the debt snowball method?

The largest disadvantage of the debt snowball is that there is potential for paying more money in interest over time, compared to if you used other methods of debt repayment.

Since the debt snowball method focuses on the smallest debt balance first, it could leave debts with large interest rates untouched. Compared to the debt avalanche method which focuses on the largest interest rate debt first, reducing the potential interest paid on debts.

What is better, debt avalanche or debt snowball?

There is no right or wrong method to attack your debt, whether that be the debt avalanche or snowball method. While using the debt snowball method can keep you motivated on your journey to becoming debt free, the debt avalanche method can save you more money over the long run.

Dave Ramsey and the debt snowball method

Dave Ramsey is a strong advocate for becoming debt free, of all debts. To become debt free he suggests 7 baby steps. In baby step number 2, after getting an emergency fund in place, he suggests to start tackling your debts using the debt snowball methods.

He describes the motivation from paying off each debt as the “secret sauce” for keeping on track to complete your debt free journey. While suggesting that the debt avalanche method wont give you that feeling of accomplishment for a long time, losing steam before completing your debt free journey.

Dave Ramsey believes that using the debt snowball method forces you to stay intentional, by paying off one debt at a time.

Check out Dave Ramsey’s 7 baby steps here.

Summary

While the debt snowball method of debt repayment is one of many styles, the first step is to sit down and write out all your debts so they can be visualised. Write down who the debts with, how much and the interest rate on each. This can be a difficult and sobering moment where you can see all your debts together.

The main thing is to remember that you are about to tackle it all and with one step at a time, you will be reducing the amount of debts and the balance on them.

Once you have your debts in front of you, you can then identify the right debt repayment strategy for you and your situation.

Consider checking out a debt repayment calculator, which can be an affective tool to help you identify which method suits you best and the time line of your debt free journey.

According to Credit Karma, their members in the Gen z (born 1997-2012) category have an average debt of £13,371 with Millennials (born 1981-1996) have an average of £40,000.

This means that people in their 20’s are heavily affected by debt, trying to remain debt free or with little debt can be difficult but here is our article on the top 5 lessons in your 20’s.

Top 5 Money lessons In Your 20s

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