Debt Snowball

The debt snowball method of paying down debt involves paying down debt from the smallest balance to the largest in order to build momentum and pay down the debt faster. The debt snowball method ensures that while you pay off debt, you enjoy the feeling of paying off full debts rather quickly. Let us look at how it works.

Before you begin paying debt using this method, you first should write down all your credit card debts, and include the balance. For this method of debt repayment, you are not paying attention to the interest rate, or minimum payments or anything else. Just note the balance. To make this process easier use this debt snowball calculator worksheet.

Arrange your debts in ascending order, with the first debt listed being the one with the lowest balance, not the highest. This might or might not be the credit card with the lowest interest rate; it might in fact be the one with the highest - it does not matter.

Once you have your debt arranged according to balance (these should include car payments and other debts as well, and not just be limited to credit card debt), you begin paying off the first debt. Perhaps initially you can only apply slightly more than a minimum payment - that is Ok.

Once you pay off that lowest debt, you will work on the second debt on your list. While you are working on the debts with the lowest balances, you are still making minimum monthly payments on the others. In fact, you should only pay minimums on the other debts, and focus all your extra money and energy on that one debt you are working on, the one that currently has the lowest balance.

Once you have paid off the first balance and you are ready to work on the next one, you apply the amount you were paying on the first debt, plus the minimum on the second and pay that on the second debt. This allows you to build momentum and pay the second debt off even faster which is why it is called the debt snowball. Let us look at some examples so this makes sense.

If you are working on paying off three credit cards and one car loan. Your debt might look like this:

Car loan balance -- $3,000, monthly minimum $300
Credit card #1 -- $400 balance, monthly minimum $10
Credit card #2 -- $1,200 balance, monthly minimum $60
Credit card #3 -- $3,400 balance, monthly minimum $95

You would order your debt like this:

Credit card #1 (minimum payment of $10)
Credit card #2 (minimum payment of $60)
Credit card #3 (minimum payment of $95)
Car loan balance (payment of $300)

Now, assume you can apply an extra $100 toward debt each month. You would pay $110 on the first credit card each month until it is paid, and then when it is paid, start work on the second credit card debt using that initial $110 dollars as an extra payment on top of the minimum payment already being paid.

As you move to the second card, the one that has a $1,200 balance and minimum payment of $60, you will begin to see the debt snowball effect. Now you will be paying that $60 minimum PLUS the $110 you were paying on the first credit card, which is now paid off. Paying $170 a month is going to quickly decrease the debt on the second credit card.

By the time you get to your car payment, you will be ready to pay $565 toward that car loan balance until it is paid off and you are debt free. You will have already paid off credit cards 1, 2 and 3, and your debt snowball payment will be up to $565, which will help to pay off your car in no time.

Here are some things to keep in mind if you are going to use the debt snowball method:

Don not incur any new debt while you are paying off debt. This is common sense, but many people will incur new debt on credit soon after having paid it off simply because of an impulse buying mentality.

Once you pay off each credit card, freeze it in a ziploc bag of water. This will force you to think about making any purchases on the card by thawing the card out to use it.

Whenever possible, try to increase the amount you are paying each month. If you get a raise, for example, apply that raise to the debt payoff. Remember, continue paying only minimums on the cards that are not part of the debt snowball at the moment.

Finally, increasing your monthly payment amount adds to the debt snowball payment. If you increase your payment by only $10 a month, as that debt snowball payment amount grows, that $10 will help to increase the payoff speed of the remaining debt balances.

Use the free Debt Snowball Calculator to see how much time and interest can be saved by using the debt snowball method of debt repayment.