How Does the Debt Snowball Method Works to Pay Off Debt? . 2024

Paying off debt is hard, but there are many ways that can help to pay off your debt fast. The debt snowball method is one of the most popular methods for paying off debts and it’s also a great way to get out of debt quickly.

Here we will discuss how you can use this method to pay off all or part of your debt in just 30 days!

What is The Debt Snowball Method?

The debt snowball method focuses on paying off debts in order of the smallest to largest regardless of the interest rate, while making make minimum payments for all your other debts.

Once you’ve paid off the smallest debt, you will pay off the next-smallest debt and so on until you have paid off all of your debts.

Debt snowball strategy is a progress toward eliminating debt through reducing the total number of debts, and when done correctly, it’s an effective strategy for getting rid of any type of debt.

How Does The Debt Snowball Strategy Works

The debt snowball method is a debt-reduction strategy focuses on putting your extra money toward your smallest balance. Aiming to help you get out of debt by prioritizing the reduction on the total number of debt instead of the total amount of debt repayment.

While this debt repayment strategy may seem counterintuitive for not prioritize the highest interest rate debts first, but the Debt Snowball method has a psychological advantage where it provides quick wins that keep you motivated.

Debt Management Plan Preparation

Before you start paying down debt, you should always create a budget by cutting out some extra expenses like eating out or going shopping with friends instead of cooking at home. This will help you save money for future payments.

Creating a budget will help you in your journey to pay off your debt and give you a clear guide on where can you save an extra amount of money each month to be used for paying off debt.

If you find yourself spending more than what you’ve planned, then cut down on one of those extra expenses until you reach a balance again.

High interest debt such as Credit Card Debt, Payday loan etc.
Unnecessary spending such as luxury goods and eating out.

To successfully become debt-free, you’ll need to keep 2 things in mind:

Staying on track with your payments
Keeping yourself motivated to stick with the plan

How To Use The Debt Snowball Strategy to Pay Off Debt Quickly?

The debt snowball approach is a 5 step process debt payoff plan where you get rid of your first debt by paying off your smallest debt first before getting to pay toward the next-smallest debt.

Here are the 5 steps to the debt snowball method:

1. Make a List of Your Debts

Begin by listing all your debts from smallest to largest, regardless of their interest rates.

List down all your debt and the amount you own for each of the debt.
Rearrange your list and put the smallest debt at the top of the list and the largest debt at the bottom.
The arrangement of the list is regardless of their interest rate and purely arranged according tot he size of the debt.

With the list you’ve created, this list becomes your roadmap to debt freedom.

2. Minimum Payments on All Debts

Minimum payment is what helps you keep a good credit history, so it become easier for you to ask for a loan and get preferential rate for your loans in the future.

Start by making minimum monthly payments on all your debts on the list.

After making your minimum monthly payments, calculate the amount of money you have left and put it aside for the next step.

Having a good credit history is key to wealth building, and when you make any highs ticket items purchase, such as a house, the interest you pay for your home loan is highly dependent of your credit rating.

3. Pay Your Smallest Debt First

Devote any extra money you have to paying off the smallest debt aggressively. This is the key to accelerate your debt payoff.

Identify the smallest debt on your list, which is on the top of the list.
Put all your extra cash on paying off this debt, meaning you’ll have to pay more than the minimum payment and reduce the total amount you own for the debt.
Focus on a single debt and do not get distracted by other debts, continue paying it offer until the debt is repaid.

4. Snowball Effect

Once the smallest debt is paid off, take the money you were putting toward it and add it to the payment for the next-smallest balance.

This creates a snowball effect, allowing you to tackle larger debts with more significant payments as you reduced the total number of debt you need to pay.

5. Repeat Until Debt-Free

Keep repeating this process and keep paying off the next smallest debt on your list until all your debts are paid in full.

As you uses the snowball method to continue paying off debt, you’ll find yourself having more extra cash to pay off the next debt, making your debt repayment process much easier to manage.

This is because, each time you pay off a debt, you free up more money to put toward the next one and eventually helping you become debt free.

Why Debt Snowball Method Works?

The debt snowball method works because when you start paying down one debt at a time, you are more likely to stick with that plan than if you were trying to tackle multiple debts simultaneously. You’ll also be able to see progress as each payment goes towards clearing out the previous debt and this will motivate you to keep going.

Simple to understand, plan and follow.
Help you to reduce any feelings of shame or guilt about your financial struggles
Offers a sense of accomplishment as you see how quickly your debts start to disappear

The debt snowball method is a quick and simple way to start chipping away at your debt. It’s easy to follow and can help you feel good about yourself because it shows you’re making an effort to improve your situation.

Debt Snowball Example

To illustrate how the Debt Snowball method works, let’s take a look at some practical example in real life:

Suppose you have three outstanding credit card balances:

Credit Card A: $500
Credit Card B: $1,000
Credit Card C: $2,000

With the Debt Snowball method:

You focus all your extra cash on Credit Card A, paying more than the minimum each month. If you could put $250 a month toward that card, you might pay it off in just two months.
Once Credit Card A is paid off, you take the $250 payment and combine it with the payment you’re making on Credit Card B. This means you’re now paying $250 + the minimum payment for Credit Card B.

In this way, you chip away at your debt until the balances fall away, one by one. The key is aggressively tackling the small debt first, accumulating payoff wins as you go.

The Debt Snowball method is not only effective; it’s also motivating. As you see your efforts making a difference, you gain momentum and discover creative ways to find extra cash for debt repayment.

Pros and Cons of the Debt Snowball Method

Like any financial strategy, the Debt Snowball method has its advantages and disadvantages. Let’s take a look in it’s pros and cons, and see if this method of debt repayment is right for you.

Pros Of Debt Snowball Method

Quick Wins: Paying off smaller debts first provides immediate victories, boosting your motivation.
Structured Approach: The method offers a clear and structured plan for debt repayment.
Motivation: Small wins early on in the process help you stay motivated and committed to your goal.

Cons Of Debt Snowball Method

Interest Savings: Since it doesn’t prioritize high-interest debts, you may pay more in interest compared to other strategies.
Larger Debts Accumulate Interest: Larger debts with higher interest rates may continue accruing interest, potentially extending the overall repayment period.
Discipline Required: The Debt Snowball method won’t change your spending habits or financial discipline. You need to stay focused on your objective.

Why You Might Want To Use Debt Snowball Method

Debt Snowball method may not be the most cost-efficient strategy, as you may end up paying more to become debt free compared to using debt avalanche method where you pay off the highest interest rate debt first.

The psychological benefits of Debt Snowball method make it a compelling choice for many individuals seeking to break free from the shackles of debt.

Unlike other debt reduction methods, the debt snowball has no complicated calculations or formulas involved so there’s nothing else to worry about when using this technique.

The debt snowball method is relatively simple, easy to understand, and implement.

Even if you have only paid off a small debt, it is still one debt less to worry about.

Who Should Use The Debt Snowball Method?

The debt snowball method is suitable for anyone who wants to get their finances back on track but doesn’t have much experience in managing money.

You don’t need to be particularly frugal, you’ll just need to be willing to make some changes that will benefit your future.

The only requirement is that you want to tackle your debt head-on.

Popular Debt Repayment Strategy to Get Out of Debt

While the Debt Snowball method is a popular choice for debt reduction, there are many other ways to pay toward your debt and become debt-free like the snowball method.

Debt Avalanche Method: Similar to the Debt Snowball, but it prioritizes debts with the highest interest rates first. This method may save you more money on interest over time.
Debt Consolidation: Combining multiple debts into a single loan or credit card with a lower interest rate can simplify your repayment and potentially reduce your overall interest costs.
Credit Card Balance Transfer: Transferring high-interest credit card balances to a card with a lower introductory rate can help you pay off debt faster. However, be mindful of fees and the interest rate after the promotional period ends.

Debt Lasso: Consolidating high interest rate credit card debt and transferring balance into lower interest rate cards, you pay off the highest interest rate first as well as minimum payment for the rest of the card.

Is Debt Snowball Method The Best Way to Pay Off Debt?

The debt snowball method is best for people who struggle with staying motivated in their debt repayment process.

Debt snowball plan is simple to understand and simple to execute. It can be a powerful tool for individuals to manage their debt and should not be overlooked.

However, I personally don’t think it is the best way to pay off debt as this debt repayment method ignore the high interest rate debt, which can be very risky, as these debt can grow at an accelerated rate through compounding making it even harder for you to pay off your debt in the long run.

In my opinion, Debt Avalanche Method is much more effective in debt management, reducing the total amount of money you have to pay towards your debt.

However, unlike Debt Snowball Method, Debt Avalanche Method may lack the psychological benefits of having quick wins at the start of your debt repayment process. You may require more discipline for it to be successful.

Debt reduction can be a great way to get started in building wealth, but once you are debt-free, your next goal will probably be learning how to save for your future.

With the right mindset, learning how to save 5-figure in just a year will be easy to achieve.

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Antony C.

Founder & Financial Writer at Income Buddies | Website | Posts by Author

Antony C. is a dividend investor with over 15+ years of investing experience. He’s also the book author of “Start Small, Dream Big“, certified PMP® holder and founder of IncomeBuddies.com (IB). At IB, he share his personal journey and expertise on growing passive income through dividend investing and building online business. Antony has been featured in global news outlet including Yahoo Finance, Nasdaq and Non Fiction Author Association (NFAA).

How Does the Debt Snowball Method Works to Pay Off Debt?