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My husband and I were first introduced to the debt snowball method while taking Dave Ramsey’s Financial Peace class a few years ago at our church. After the method was explained, I wondered if it would actually be realistic enough for us to follow. Looking back, I don’t know why I ever doubted the debt snowball method. I can honestly say that utilizing this method has changed our lives forever.
Fast forward a few years and we are down to our very last consumer debt, with the exception of the mortgage. Using the debt snowball method has helped us to pay off thousands of dollars worth of student loans, credit cards and auto loan debt. I’ll explain what the debt snowball method is and how it works below, but first, let me tell you a few reasons why you should use this method.
The debt snowball method helps you to gain:
1. Quick Wins
2. Focus
3. Motivation
4. Change in Behavior
5. Raise in Income
What is the debt snowball method?
The debt snowball method is a plan designed to help you generate quicker results while paying off debt. While this method may not make sense mathematically, it makes tons of sense in regards to building momentum and motivating you to pay off more debt. This method will allow you to see progress as you pay off smaller debts first, regardless of interest rates.
Steps
Prior to utilizing the debt snowball method, there is some pre-work required. The first two steps should be done immediately.
1. Create a Budget
Before you even develop a plan to pay off debt, you should create a budget which lists all of your income and expenses. You need to know where you are starting so that you have an idea of where you are trying to go.
2. Trim the Fat
Really dig into your expenses and determine if there is anything you can get rid of. This will increase the amount you can apply toward debt payments, hence the income boost listed above.
3. List All Debts
List all of your debts in order, beginning with the debt that has the lowest balance. Ignore the interest rates. The debt snowball method focuses on paying off the debt with the smallest balances, unlike the debt avalanche method which focuses on paying off the debts with the highest interest rates.
4. Make the Payments
After you’ve listed all of your debts from smallest to largest, begin making the minimum payments on all balances except for the debt with the lowest balance. Any extra money, in addition to the minimum payment, should be paid towards the debt with the lowest balance.
5. Earn Extra Income
If you’ve trimmed the fat from every expense that you could and your income is still not enough to kick start your debt payoff, then you might have to pick up a part-time job or start some sort of side hustle. If you need extra income to help get rid of your debt, check out my blog post for Ways to Earn Extra Money this Month.
Why should YOU use the debt snowball method?
I listed the reasons why you should use this method above; however let’s get into a bit more detail.
1. Quick Wins
Paying off the smallest amount of debt first allows you to see faster results which also builds your confidence. When you actually see progress after you’ve paid off that first $500 in credit card debt, then it pushes you to do more.
2. Focus
By making minimum payments on all debts except the debt with the lowest balance, it helps you to focus on just that particular debt. This way you are not all over the place and you won’t end up becoming discouraged.
3. Motivation
Once you develop a rhythm and realize that you can payoff the debt, you gain momentum and therefore you become motivated to pay off even more debt. Seeing positive results is an absolute game changer!
4. Behavior Change
When you make the decision to begin paying off debt, you immediately go through a mindset shift. It takes a lot of humility for a person to recognize that there is a problem and then act upon it. This is certainly a sign of maturity and improvement.
5. Raise in Income
As you continue to pay off debt, you will notice that you suddenly have more money to actually pay the debts off. As you start cutting back and become more diligent about paying off debt, extra income will seem to find its way to you.
Example
Now that I have provided a few benefits of using the debt snowball method to pay off debt, let’s look at a quick example to help you understand it a little better.
So let’s pretend you have 1 credit card, 1 personal loan, and 1 student loan. Remember, as stated above, you should list all your debts beginning with the lowest balance.
- Credit Card – Debt Owed = $700 = Monthly Payment of $25
- Personal Loan – Debt Owed = $1,200 = Monthly Payment of $40
- Student Loan – Debt Owed = $10,000 = Monthly Payment of $400
Using this scenario, if you were to pay the minimum payments due on all of the above debts, plus add an additional monthly payment of $100.00 to the credit card, then the credit card could be completely paid off in about 6 months.
Then you could take the $25 minimum payment, plus the $100 extra payment from the credit card and add it to the $40 payment for the personal loan for a total payment of $165.00. The personal loan could be paid off in roughly 7 months.
Now, take the $165.00 that was previously used to pay off the personal loan, in addition to the $400 minimum payment and apply it to the student loan for a total of $565. In roughly 18 months, you will have paid off the student loan.
Final Thoughts
When paying off debt, you must realize that it won’t be easy. No sacrifice is ever easy. If you want to change the trajectory of your life and that of future generations, stay focused and put it in the work. The debt snowball method really works and it allows you to see your actual progress much quicker than if you had started paying on the highest debt first. It also keeps you motivated and if followed correctly can have you living a debt-free life sooner than you think. I wholeheartedly encourage you to use this method because it will change your life. It certainly changed mine.
