Debt Snowball

Debt Snowball
The “debt snowball” is a strategy for debt repayment. You make the minimum payment on all of your accounts, but you target the debt with the lowest outstanding balance to pay off first.

What does “Debt Snowball” mean?

“Debt snowball” is a debt repayment method. It means you target your debt with the smallest balance to pay off first. The other major repayment method is called the “debt avalanche.” It targets the debt with the highest interest rate.

How does the Debt Snowball method work?

To start a debt snowball plan, you organize your debts based on how much you owe. You pay the minimum amount on all the debts, but you target the one with smallest balance to pay off first. For that one, you devote as much money as you can. Once you pay the balance in full, you redirect the money from that debt to the new debt with the smallest balance. You repeat this process until all of your debts are paid off in full.1

An important step in a debt snowball plan is creating a budget, and this is something you should do before you begin. Your budget will list all of your income and expenses, and it allows you to determine exactly how much you can put toward debt repayment. If you don’t have extra income you can use, you may need to cut expenses and use the money you free up to pay your debts. Creating a budget is an important step in the process, as you want to devote as much money as you can to repayment.

Why does the Debt Snowball method work?

Because the debt with the lowest balance is the debt that can be paid of the quickest, you’ll get a rewarding feeling of satisfaction as early in the repayment process as possible. Debt repayment isn’t solely about money—it’s also about psychology. The debt snowball method is designed to give you an early boost of encouragement that’ll help you stay committed to your plan. In fact, a recent study found that the snowball method is the fastest way to pay of your debt.2

What are the disadvantages of the Debt Snowball method?

While the debt snowball provides a psychological edge, it’s not the most efficient way to pay off your debt. The debt avalanche—another repayment method—targets the debt with the highest interest rate. This method will save you money, as the debt with the highest interest rate is probably your costliest one. If you pay it off first, that interest stops accumulating. However, a debt with a high interest rate might be difficult to pay off, so you might grow discouraged and give up if you target it first.

The debt snowball, on the other hand, gives you a quick achievement by letting you pay off the easiest debts first. The more expensive ones continue to accumulate interest, but your early successes might embolden you tackle them.

What is a Debt Snowball Calculator?

A debt snowball calculator helps you create your snowball payoff plan. They’re available from a variety of sources online, and they may differ depending on who created them.

The best debt snowball calculators allow you to list all of your debts. You enter how much you owe, how much you can afford per payment, and the interest rate on the debt. The calculator will then determine how many payments you have left and how much you’ll pay in interest by the time the debts are cleared.

Bottom Line

Paying off debt is hard. The advantages and disadvantages of one method or another come down to your personal preferences. The snowball method has been shown to work, but it might not work for everyone. Do what works best for you.

References:

1 Hamm, Trent. “The Debt Snowball Concept: How I Made It Work For Me.” The Simple Dollar, 5 Jan. 2017, http://www.thesimpledollar.com/the-debt-snowball-concept-how-i-made-it-work-for-me/. Accessed 16 March 2017.

2 New, Catherine. “‘Snowball’ Debt Method Is Fastest Way To Pay Off Your Bills, Research Shows.” Huffington Post, 16 Aug. 2012, http://www.huffingtonpost.com/2012/08/16/snowball-debt-method-fastest-way-to-pay-bills_n_1784166.html. Accessed 16 March 2017.

Related Content