Two major methods dominate the debt repayment sphere: the debt snowball and the debt avalanche.
One says you should pay off debts with the highest interest rate first. That’s the debt avalanche method.
The other says to pay off your smallest balances first so that you can enjoy quick victories and build confidence.
That one’s called the debt snowball method, and that’s what we’ll explain in this post.
Does the Debt Snowball Method Really Work?
Popularized by money guru Dave Ramsey, the debt snowball method involves paying off one credit card or loan balance at a time, starting with the smallest balance first.
It’s perfect for people who are motivated by quick wins, but this method has a downside: Those who choose it end up paying more interest long term.
Many people disagree with the concept of paying more interest for quicker wins. Why would you pay off smaller balances and let those interest mongers sit?
Because you’re not an algorithm; you’re a human being. Behavioral economics has shown us that human beings don’t behave like math equations.
When you stare at your credit report and see a list of lenders and credit card companies staring back at you, it should be enough for you to cut up your credit cards, take the UberEats app off your phone and put all of your discretionary income toward paying off debt.
But even with the knowledge, we find ourselves sitting with a $5 latte wondering how we even ended up in the Starbucks drive-thru.
The debt snowball method helps you take the first step… and the next. And the one after that.
How to Use the Debt Snowball Method
If you’re skeptical about paying a little extra interest but know you need quick wins, give the debt snowball a try. Once the plan is in action, you’ll see how negligible that extra interest really is.
Here’s how to conquer your debt with the snowball method in five simple steps.
1. List All Debts From Smallest to Largest
Start by listing all your debts. Then, order them from the smallest balance to the largest. This can be done on paper, a spreadsheet, an app or in a handy-dandy debt snowball calculator.
Include all the debts you want to pay off quickly. We recommend:
- Credit card debt
- Student loans
- Personal loans
- Car loans
- Unpaid medical bills
- Mortgage-related debt
- Any other stuff debt collectors keep calling you about
You can use a site like Credit Sesame to see a full list of what you owe and to whom.
Don’t include debts that are outside of (or approaching) the statute of limitations for responsibility. After a certain amount of time has passed — usually at least three years, but it varies by state — creditors can’t sue you for unpaid debt.
Well, they can attempt to sue you… but the case will be dismissed.
2. Budget to Pay the Minimum on Every Debt
Next, you’ll figure out the minimum due to each debt. A rough estimate will be on your credit report at Credit Sesame, but you’ll want to confirm by checking individual accounts and paper statements.
To start the snowball, you’ll ideally pay the minimum balance across all your debts. If you’re struggling to make those payments, take a look at your budget and see where you can cut back your discretionary spending. Look for ways to earn money on the side.
Try every month to lower your spending and increase your income, because you’ll need that extra money for our next step.
3. Put All Extra Money Toward Your Smallest Debt
Once you’ve budgeted in minimum payments for all or most of your debt, put any extra toward the first loan on the list — the one with the lowest balance.
That means you’ll be paying the minimum plus your designated extra on that debt.
4. Once It’s Paid Off, Add That Total to the Next Smallest Debt
By starting with your smallest debt, you’ll theoretically finish paying the balance off faster than you could have paid any other. But don’t stress if it feels like even the tiniest debt is taking forever to pay off; there’s a learning curve to this, and most people start off slow.
Once you do pay off that smallest debt, take every penny you were putting toward that debt and add it to the monthly payment for your next debt — the second smallest.
That means you’ll be paying the first debt’s minimum payment, the second debt’s minimum payment and your designated extra all toward the second debt.
Pay that amount until the second debt is paid off. Depending on the size and interest rate of your second smallest debt, you could see that debt dry up even quicker than the first.
5. Repeat
Once your second debt is paid off, continue the process with all other debts.
For the third debt, pay the total of the first debt’s minimum payment, the second debt’s minimum payment, the third debt’s minimum payment and the designated extra every month.
It’s a simple concept, but it’s not easy. That’s why little wins along the way are so helpful.
The Debt Snowball in Real Life
Sometimes it’s easier to see concepts like this played out in numbers. So let’s try an example. Let’s say you have:
- A Visa card with a $2,000 balance at 18% and a $40 monthly payment.
- A Mastercard with a $7,000 balance at 24% and a $150 monthly payment.
- A car loan with an $8,000 balance at 4.5% and a $285 monthly payment.
- A student loan with a $10,000 balance at 3.86% and a $125 monthly payment.
You’ve cut your expenses and taken on overtime at work, so you have $1,000 each month to put toward debt.
Your minimum payments add up to $600 each month. This means you’ve got $400 extra to put toward your snowball.
Debt No. 1: Months 1-5
The first debt you’ll tackle is the $2,000 Visa. You’ll make the monthly minimum payment of $40 and an additional $400 payment — for a total of $440 each month — while making minimum payments to everything else.
| Debt Account | Balance | Monthly Minimum | You Pay |
|---|---|---|---|
| Visa | $2,000 | $40 | $440 |
| Mastercard | $7,000 | $150 | $150 |
| Car loan | $8,000 | $285 | $285 |
| Student loans | $10,000 | $125 | $125 |
By putting $440 toward the Visa every month, you can pay that baby off in five months and still have extra to throw to debt No. 2 in month five. One down, three to go!
Since you’ve been paying the minimum on the other three debts, some interest has accrued on them, but not much. After five months, you’re left with approximately:
- $6,950 on your Mastercard
- $6,700 on your car loan
- $9,530 on your student loans
Your monthly minimum payments for those debts will total $560. You still have $1,000 budgeted for debt payments, so your extra will now equal $440. (See how it snowballs?)
The next debt to tackle is the Mastercard.
Debt No. 2: Months 6-19
You’ll make the monthly minimum payment of $150 and the additional $440 payment toward your Mastercard — for a total of $590 per month — while continuing to make minimum payments to the other two.
| Debt Account | Balance | Monthly Minimum | You Pay |
|---|---|---|---|
| Mastercard | $6,950 | $150 | $590 |
| Car loan | $6,700 | $285 | $285 |
| Student loans | $9,530 | $125 | $125 |
At this pace, you’ll have your next debt knocked out 14 months after your first! A total of 19 months is way better than the 137 months Mastercard wanted you to spend making minimum payments.
Nineteen months may not seem that long in the grand scheme of things, but it is when you’re funneling $400 to a credit card company every month instead of taking trips or buying the latest gadgets.
That’s why having that first win after five months is so powerful.
Debt No. 3: Months 20-23
There may have been a lag in the last year, but this is where the snowball picks up momentum.
Assuming you haven’t found more ways to cut costs and haven’t increased your income with any raises or side hustles, you still have $1,000 to put toward your car and student loans each month. Your minimum monthly payments are now $410, leaving you with an extra $590.
You’ll make the monthly minimum payment of $285 plus the additional $590 payment on your car, while continuing to make minimum payments to your student loans.
| Debt Account | Balance | Monthly Minimum | You Pay |
|---|---|---|---|
| Car loan | $3,000 | $285 | $875 |
| Student loans | $8,200 | $125 | $125 |
And just like that, in four months, your car is paid off. Remember when it took five months to pay off a $2,000 credit card? Now you can pay off a $3,000 car in four!
Debt No. 4: Months 24-31
Finally, you’ll hit the student loans with the full $1,000 per month until they’re paid off.
| Debt Account | Balance | Monthly Minimum | You Pay |
|---|---|---|---|
| Student loans | $7,800 | $125 | $1,000 |
And in eight months, 31 months from when you began, you’ll be completely debt-free! That’s $27,000 of debt in two and a half years.
At first, it probably felt like it was going to take 12 years. And if you’d stuck with minimum payments, it would have. But now you’re debt-free with a budget that has an extra $1,000 of discretionary income each month.
Time for a vacation.
Debt Snowball vs. Debt Avalanche
You’ll see that the debt in the above example accrued $2,962 in interest.
The same debt portfolio paid off with the debt avalanche method would be paid off in the same number of payments, but you’d pay approximately $2,797 in interest. This means using the debt snowball method will cost you an extra $165.
However, with the debt avalanche, you’d have to wait over a year for your first debt to be paid off.
So, why choose the debt snowball? It’s about motivation.
If you tackle debt with the avalanche method, you might be paying on that high-interest stuff for a while before you can knock it off your list. It can feel like you’ll never be done paying off debt.
The snowball method lets you see results more quickly — and your list of debts gets shorter. If you’re like many people who have trouble staying focused, those wins can be the boost you need to keep you going.
Dana Sitar is the branded content editor at The Penny Hoarder. Say hi and tell her a good joke on Twitter @danasitar.
Former staff writer Jen Smith contributed to this post.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
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