What if I told you there is a system that you can use to say goodbye to your debts, reduce stress, and keep yourself motivated while you pay? That’s what the snowball method promises.
Dave Ramsey, who made the system popular, compares it with a snowball effect. “Every time a snowball rolls over, it picks up more snow and gets larger,” says Ramsey. The same happens when you pay your debts by using this method. Ramsey adds that your motivation increases when you get “quick wins.”
Next, you can learn all about the snowball method and how to use it. Find out if this is what you need to get out of debt once and for all.
How Does the Snowball Method work?
The aim of the snowball method is that you systematically pay off your debts, starting with the smallest balance. You should put all your effort into this one while making minimum monthly payments on the rest.
When the smallest debt is paid in full, you roll the money you were paying on that debt into the next lowest balance.
The idea of starting with the smallest debt is that you get small wins. The satisfaction of seeing how your debts are gone one by one will help you stay motivated until you pay off all of them.
According to Ramsey, the most sensible thing to do would be to pay off debts with the highest interest rates first. However, personal finance has more to do with habits than with reason.
Therefore, some quick wins can help you gather the psychological and emotional momentum you need to ditch your debts altogether.
This method can be helpful if paying off debts is stressful for you or if you are one of those people who need to stay always motivated to reach your goals.
The Snowball Method in Four Steps
Although forming new habits is not a piece of cake, following the snowball method is very simple. Just go by these steps:
1. Make a list
Write a list of all your debts, from the smallest to the largest one. Leave out interest rates.
Don’t include your mortgage, either. Interest rates are generally low, and your home serves as collateral.
2. Pay the minimum
Every month you will have to make minimum payments on each debt, except the smallest one. If you don’t make the minimum payments required to meet your obligations, you will end up paying fines or other fees. That could also affect your credit score.
3. Put extra money in the smallest debt
Make an additional effort to pay off the smallest debt, the first on your list. The goal is to tackle it head-on. To get more money, you could take a side job on the weekends, cut down on expenses, or sell things you don’t use.
4. Pay the next debt
When you pay off the smallest debt, you can cross it off your list. You will able to use the money you were paying on that debt to pay off the next one. You will have to keep on making minimum payments to pay off the other debts.
An Alternative to Pay Off Your Debts: The Avalanche Method
The snowball method is not the only strategy at hand to get rid of your debts. Other methods are more aggressive. For instance, the avalanche method involves paying off the debt with the highest interest rate first instead of the smallest one.
It is an effective strategy when it comes to saving money from interest. Nevertheless, a long time may go by before you ditch your first debt.
The avalanche method is similar to the snowball method. The difference is that the first item on your list will be the debt with the highest interest rate. You should focus your attention on this one, pay it off, and then move to the next one.
In the process, you will also have to make minimum payments to pay off the other debts.
The Snowball Method in Practice
The snowball method works like this. Suppose several debts piled up: credit cards, a business loan, and a car loan. Let’s organize them from the smallest to the largest one:
|Type of Debt||Amount||Minimum Monthly Payment|
|Credit Card 1||$4,000||$100|
|Credit Card 2||$5,500||$160|
Make minimum payments for all your debts, except for credit card 1. Let’s suppose that, to pay off the credit card, you gather $100 apart from the minimum monthly payment. If you had $200, you could pay off the debt in half the time.
By this time, you will start feeling the effects of the snowball method. Now that credit card 1 debt is out of sight, you can use those $200 plus the $160 of the minimum payment to pay off credit card 2. By having $360 per month to pay off the debt of this second credit card, you will be able to get rid of it in less time.
When you are done with credit card 2, you can roll those $360 over to the $300 of the minimum payment for the car loan. The cycle goes on until you are debt-free.
Pros and Cons of the Snowball Method
This method has some advantages (especially psychological ones) over other ways, but it could have an undesirable financial impact. Let’s have a look at its pros and cons.
- You will gather psychological momentum. When your debts start going away, your motivation will increase, and you will feel like paying off all your debts until they are entirely gone.
- You will manage your money better. The method helps you organize your payments: you will be able to know where the additional funds to pay off your smallest debt will come from, which are the minimum payments for the other liabilities, and when they are due.
- You can wind up paying more money. The snowball method does not bear in mind your debt interests. If you focus on the smallest balance, you could be neglecting those debts with the highest interest rates that could take you a lot of time to pay off.
Is the Snowball Method Right for You?
If you can keep yourself motivated while you pay off your debts and you stick to the plan every month, this method could be the ideal solution for your debt issues.
Those who have small debts could make the most of this strategy because paying them off would encourage them to keep on with the method.
The snowball method is also right for people with traditional debt profiles, such as relatively small credit card balances with high-interest rates or higher car loan balances with lower interest rates.
Yet, this method is not for everyone. While the snowball method can have positive psychological and emotional effects, paying off debts with the highest interest rates, no matter how small or large they are, could make more sense for your finances.
Therefore, the snowball method may not be the perfect choice for people having more debts with high-interest rates than debts with low-interest ones.
Other Methods You Should Consider
The snowball method and the avalanche method are not the only alternatives to get out of your debt. You can explore these options:
- Debt management program. With this method, counselors analyze your financial situation to act on your behalf with your creditors. Their mission is to help you plan and set up a system that allows you to get rid of your debts. You will also learn how to manage your money so that you always stay within your budget.
- Debt consolidation. When a person or a company has applied for several loans from different lenders, they have to make monthly payments to each of them and stay on top of interest rates and due dates. That can turn into an uncontrollable situation.
A debt consolidation loan can make things easier by covering all these obligations and multiple monthly payments with one single monthly payment.
A Camino Financial business loan can be perfect for paying off all your business debts. You can get up to $400,000 in quickly and with minimum requirements.
Choose the Best Strategy to Pay Off Your Debts
The snowball method can keep you motivated while paying off all your debts, starting with the smallest balance. Unlike the avalanche method, you don’t have to worry about interest rates, and you can put it into practice just by following four steps.
Although it is a good strategy thanks to its psychological impact, it could also make you pay more interest in the long run. If your debts are typical, give the snowball method a chance.
However, if your debts have mostly high-interest rates, keep away from this method.
Learn how to leave your debts behind quickly. Keep on reading 10 Strategies to Pay Off Debt Quickly.