What is the debt snowball method?
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Updated 9:34 a.m. UTC Jan. 30, 2024
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Debt can be a heavy burden to carry, both financially and emotionally. It can lead to stress, worry and even depression. If you feel like you can’t dig yourself out of your financial hole, the debt snowball method is one strategy to gain some much-needed momentum in your payoff plan.
Here’s a closer look at what the debt snowball method is and how it works.
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What is the debt snowball method?
The debt snowball method was popularized by financial expert Dave Ramsey as a way to pay off debt faster. It works by having you focus on paying off your smallest debts first, no matter their interest rate.
This approach might seem counterintuitive — after all, why should someone pay off their smallest balance when they could be tackling their highest-rate debts first? However, that’s where the “snowball effect” comes in. By starting small and building momentum, each success can help motivate you to tackle your next largest debt until all of your debts are paid off.
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How to use the debt snowball method
Follow these steps to get started with the debt snowball method:
- Make a list of all your debts, ordering them from smallest to largest balance.
- Calculate your income and make another list of your recurring expenses (like rent, groceries, utilities and minimum debt payments), with a note of how much you spend on each.
- Subtract your expenses from your income to see what extra funds you have.
- Put this extra money toward your smallest balance while making only minimum payments on all other balances.
- Once your smallest balance is paid off, move on to the next-largest balance while also continuing to make minimum payments on all other balances.
- Rinse and repeat until you’re debt-free.
Keep in mind: “Missing payments can cripple your credit score or lead to default,” says Nate Hoskin, a certified financial planner (CFP) and founder of Hoskin Capital. “So if you’re considering using the snowball method, it’s important to remember that you still have to pay the minimum payments on all other debts while focusing on the debt with the smallest balance.”
Debt snowball example
Let’s say your total amount of debt is $25,000, divided into five different accounts with different balances and interest rates:
| DEBT TYPE | BALANCE | INTEREST RATE |
|---|---|---|
Debt A (medical bill)
| $1,500
| 0%
|
Debt B (credit card)
| $2,000
| 15%
|
Debt C (credit card)
| $3,000
| 25%
|
Debt D (car loan)
| $8,500
| 5%
|
Debt E (credit card)
| $10,000
| 30%
|
Using the snowball method, you’ll pay off Debt A first because it has the lowest balance — even though it doesn’t charge interest. Once that’s paid off completely, you’ll move on to Debt B followed by Debt C until all five accounts have been paid off in full.
Notice that with this method, your balance with the highest interest rate — Debt E — doesn’t get paid off until the end.
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Pros and cons of the debt snowball method
Pros
- Quickly builds momentum: By focusing on smaller balances first and then steadily progressing to larger ones, you experience quick wins.
- Boosts motivation levels: The act of making progress quickly can be extremely motivating. “Paying off that first card or loan will be a victory that encourages you to keep going,” says Hoskin.
- Offers a low mental barrier: Because you can experience so many quick wins in the beginning, using the debt snowball method can help reduce mental barriers such as fear, guilt and shame associated with having debt.
Cons
- Can cost more in the long run: If you have a large debt with a high interest rate, that debt might accrue a lot of interest before you get around to paying it. “In this case, it may be more optimal to use the avalanche method,” says Hoskin.
- Slows your repayment: Since this approach focuses on paying off smaller amounts first (which might have lower interest rates attached to them), it could take longer to pay off debt that’s accumulated more interest.
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Debt snowball vs. debt avalanche
The debt avalanche method is another strategy that can help you pay down debt. Like the debt snowball method, it involves making more than your minimum payment each month to zero out your balances — however, it works differently.
The debt snowball method has you pay down debts from smallest to largest balance, regardless of interest rate. The debt avalanche method, on the other hand, focuses on paying off debts from highest to lowest interest rate, regardless of the balance.
“The debt snowball method works best for someone with multiple debts (i.e., multiple credit cards) with similar interest rates,” Hoskin says. “But for someone with a single large debt (i.e., student loans), the snowball may not have a large benefit. And it may be worth it to look into refinancing, changing the repayment terms or seeking additional income to enable larger payments.”
How to tell which method is right for you:
- Debt snowball method: Best if you’re motivated by quick wins.
- Debt avalanche method: Best if you want to save the most money on interest.
Does the debt snowball method really work?
Although the debt snowball approach doesn’t always make economic sense, it does work. This is because focusing on one small goal at a time can boost positivity and provide much-needed motivation.
Once you completely pay off one small account and see it disappear for good, it can light a fire under you to pay off bigger balances as quickly as you can. It almost becomes a type of game where the prize is financial freedom.
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Frequently asked questions (FAQs)
Neither method is better than the other. Ultimately, choose the one that “clicks” with you the most — that way you’ll be inspired to stick with it.
You could also consider a hybrid method where you can mainly use the debt avalanche but put any unexpected windfalls toward your smaller accounts. This way, you can experience the small wins of paying off debts as well as save money on interest by focusing on your high-interest debts.
The answer depends on what motivates you. If you prefer seeing quick results, then the debt snowball method could be a good fit for you. On the other hand, the debt avalanche method works well for people who want to save more money on interest by focusing on high-interest debts.
While paying off debt is a good goal, it’s still essential to save money in an emergency fund. This is because it acts as your financial security — ensuring that you can cover unexpected expenses without having to add more debt to your plate.
Ideally, you’ll want to save enough to cover your expenses for three to six months. If that feels impossible, even saving enough to cover one month’s expenses is a good start.
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