Debt can be one of the biggest roadblocks to financial freedom. Paying it off can decrease anxiety, put your dollars to work more effectively, and reduce interest expenses.
Fortunately, there are a number of ways to start paying off debt. One popular strategy is the debt snowball method.
What is the debt snowball method?
With the debt snowball method, you focus on paying off your smallest loan or credit card first while paying only the minimum on your other debts. When the first debt is paid off, you move on to paying off the second-largest loan or credit card and continue this pattern until you have eliminated all your debts.
As you may have guessed, this method gets its name because it’s like building a giant snowball. You start with a little snow (or payments you make in excess of your minimum) and keep rolling until you have a huge snowball (of totally paid-off debt).
Why does the debt snowball method work?
By tackling the smallest debt first, you’ll see progress faster, which can motivate you to keep going on your debt pay-off journey.
Some experts argue that it’s better to pay off the loans with the highest interest rate first. This strategy is called the debt avalanche, and while it can save you money in the long run, it might not have the same motivating effect that paying off your little loans first can have.
For example, if you attack the loan with the highest interest rate first, but that also happens to be a loan with a big balance, you may not see progress for a long time. That may weaken your commitment and make it more likely that you give up on eliminating debt.
By starting with the smallest amount, the debt snowball method helps you take that first step, which is often the most difficult. Paying off that first debt is a real motivator, giving you a quick success that can encourage you to pay off even more.
Research from Harvard University’s Business School supports the idea that paying off the smallest debt first can increase the odds of success.
What’s the process and how can I tackle it?
First, make a list of your debts from the smallest to the largest.
Be sure to include every debt except your mortgage. While paying off your mortgage early can be a smart step in some situations, it’s wise to consider it in connection with other goals, such as eliminating other debts and saving for retirement. In addition, you may get a tax deduction for mortgage interest that effectively lowers your borrowing costs on this debt.
Common types of debt to include are:
- Credit cards
- Student loans
- Medical bills
- Car loans
- Home-equity loans
- Tax bills
Then, determine how much you have in your budget to add to the minimum payment on the debt with the smallest balance. An easy way to do that is to use a budget template, which will let you utilize technology to track your finances for free, while keeping your banking information private.
Debt snowball: An example
Let’s say you have three debts you’d like to snowball away: a credit card, a car loan, and a student loan. Here’s how you would fare if you just paid the minimum on each loan until the three debts are paid off:
|
Debt Type |
Balance |
Interest Rate |
Minimum Payment |
Payoff Time |
Total Interest |
|
Debt 1 |
$1,000 |
19% |
$30 |
4 Years |
$432 |
|
Debt 2 |
$15,000 |
4% |
$276 |
5 years |
$1,576 |
|
Debt 3 |
$30,000 |
5% |
$379 |
8 years |
$6,478 |
Now let’s see what would happen if you used the debt snowball method, adding an extra $100 per month to the payment on your lowest balance debt (Debt 1) until it’s paid off, then moving that extra $100 to the next biggest balance (Debt 2), and so on:
|
|
Before debt snowball (Minimum payments) |
After debt snowball (Adding $100/month) |
|
Total monthly payment |
$685 |
$785 |
|
Total interest |
$8,487 |
$6,550 |
|
Debt-free date |
8 years |
5.5 years |
In total, you can save $1,936 interest and pay off your debt 2 years and 7 months faster.
You can do the math on your own debt scenario using this debt snowball calculator from NerdWallet.
Is the debt snowball method right for you?
The debt snowball is a great strategy for people who have multiple credit cards and loans they want to pay off. If staring at your mountain of debt is making you feel overwhelmed, then the debt snowball may help you take it one step at a time. Just be sure to keep making minimum payments on your other debts, and don’t forget to celebrate every paid off loan—looking forward to these wins may be just the motivation you need to finally be debt-free.
