Having debt is no fun.
I mean no fun at all!
Yet did you know that the average American has a debt of $38,000 not including a mortgage?!! (source)
That is shocking.
Having debt is like carrying a huge weight on your shoulders everywhere you go.
Most people believe that having debt is a normal thing and everyone has it.
This is simply not true at all.
The truth of the matter is that you don’t have to live life this way. There are things that you can do to get yourself out of this situation.
This is where the debt snowball method comes into play.
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What is the debt snowball method?
The debt snowball method is a way of paying off debt as quickly as possible, hence it is called snowball.
The method is taught by Dave Ramsey who is a very well respected talk show host on the topic of finance.
He teaches the debt snowball method as a way to motivated when repaying debt whilst doing it as quickly as possible.
To use the debt snowball method you list out all of your debts in order from the smallest to the largest irrespective of the interest rate that they hold.
You start with debt number one and pay off as much as you can on top of the minimum payment for it.
All other debts you keep to the minimum repayment amount.
Once the first debt is paid you then start to pay the second debt but add the money that you were paying from the first debt to the second even though you have now paid it off.
This is what your repayment would look like:
Credit card $800 (debt) $50 (minimum repayment)
Medical bill $1000 (debt) $65 (minimum repayment)
Loan $ 1700 (debt) $80 (minimum repayment)
With the debt snowball method, you would pay it off like this:
Credit card Month 1 $800 debt ($50 minimum repayment + $350 overpayment)
Month 2 $400 debt ($50 minimum payment + $350 overpayment)
You then move on to the next debt on the list (remember that you are working on only overpaying on the smallest debt first the other payments stay at the minimum amount.
Medical bill Month 1 $1000 debt ($65 minimum repayment + $400 that is freed up after paying off the credit card bill) = $465 per month
You continue to pay this bill until you have cleared it off completely. Once cleared you then move onto the next bill.
Loan Month 1 $1700 debt ($80 minimum repayment + $465 (from the paid off credit card & medical bill) = $545 per month
In essence, you would be paying back $545 a month on your last debt which is the loan. That would only take you approximately 3 months to pay off.
This is why it is called the debt snowball method. It takes a little while to gain momentum but when it does there is no stopping it.
Why does the debt snowball method work?
If you look at the debt snowball method, the reason it works so well is that you are continuously keeping your payments the same even though you have technically paid off some debts already.
If you are managing to pay off the debt when you have all 3 going at the same time you should be able to continue doing it until all debts are cleared.
For a lot of people, once they finish clearing one debt they think, oh thank goodness for that and then take their foot off the pedal and start spending the freed up money elsewhere.
This is not a good strategy to have as you are likely to get yourself into more debt.
In reality, if you continue to use that money to pay off more of your debt quickly you will be out of debt before you know it.
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Who is this method for?
This method works great for anyone who wants to be committed to paying off their debt in a short amount of time.
The method is set up so that you stay motivated throughout by being able to see how quickly you can pay off the debts.
This is the reason it is important to start with the smallest debt first.
If you know you are the type of person who loses motivation quickly then this is the perfect debt payoff method for you.
Who is this method not for?
The debt snowball method will not work for anyone who is not fully committed to paying off their debts.
We understand that sometimes life happens and that you may not be able to keep up the full overpayments each month, but you must stay committed to the process otherwise it won’t work for you.
If you are going to be wishy-washy about it then it is already doomed to fail and you will likely give up during the process.
In order for anything to work, there must be a certain level of commitment and hard work on your part.
You can be given all the tools but it is up to you to implement them at the end of the day.
Is there a downside to the debt snowball method?
Yes, as with everything there is always a downside.
This method works on commitment. Although there is reward in seeing those small debts get paid off fairly quickly you have to keep going at full speed in order for it to work effectively.
Some people are not able to do this.
To use the debt snowball method you are encouraged to take on extra work or sell things in order to raise extra cash if your budget doesn’t have any extra movement for the overpayments.
Whilst selling things might work for a few months, you may not have this opportunity every month and could therefore not be able to keep the momentum up.
This could be discouraging for some.
Final thoughts on the debt snowball method
Overall I believe, this is a really great method and one that can produce really great rewards quickly.
Anything worth having in life is worth working hard for. Clearing debt is no different.
If you put in the hard work now it will pay off in the future.
Just imagine your life with no more debt.
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