What is the snowball method of paying off debt?

There’s something very satisfying about crossing off items on your to-do list. The snowball method of paying off debt benefits from this bit of human psyche. Here’s how it works and how to know if it’s the right method for you.

What is the snowball method?

The debt snowball method is a financial strategy popularized by personal finance author and radio talk show host, Dave Ramsey. It’s targeted at people who have several debts to pay off, and who have some room in their budget to make the minimum payments on their debt, plus a bit extra. Done correctly, the debt snowball should help you pay off your debts much more quickly and with less interest than if you only made the minimum payments on your debts. 

How does the debt snowball method work?

With debt snowball, you arrange your debts from smallest to largest and that becomes the order that you’ll pay them. You pay the minimum on all your debts, but you put an extra amount of money toward the smallest debt on your list. Once you’ve paid off that debt, you take the money you were paying toward it and apply it to the next debt on your list. Then you keep “snowballing” your debt payments and knocking out the debts on your list until you’ve paid them all.

To see how quickly you would be able to pay off your debts and how much interest you would save, you can enter your debts into this calculator.

Related article: Debt avalanche vs. debt snowball: Here’s what you need to know

The first step of the process is to create your list of debts, order them from smallest to largest, and include the minimum monthly payment for each debt and the interest rate. Also take some time to go through your finances and figure out how much additional money you can afford to pay each month toward your debt.

(One debt that usually isn’t included in the debt snowball method is your mortgage. Reasons for that can include the large size of mortgage payments, the fact that mortgage interest rates are usually low and that mortgages can be considered good debt.) 

Related article: Do you know the difference between good and bad debt?

When you’re done making your list of debts, it should look something like this:

Credit Card A: $2,000, 17.99% APR, $80 monthly payment

Credit Card B: $3,500, 20% APR, $90 monthly payment

Student Loan: $8,000, 5% APR, $85 monthly payment

Car Loan: $15,000, 7.99% APR, $300 monthly payment

Using the debt snowball method, you would pay off Credit Card A first and pay off your car loan last. You would make the minimum payments on each debt and add the extra amount (let’s say, $100) toward your payment for Credit Card A. 

Once you’ve paid off Credit Card A, you would move on to the next smallest debt on your list, in this case, Credit Card B. You would continue making the minimum payment toward Credit Card B, but now you would also add the money you’d been applying toward Credit Card A, which would include the minimum payment and the $100 extra. You keep following those steps, rolling the payments forward, until you’ve paid off all your debts.

If you find you have additional money on hand one month (say, from a tax return) or that you can regularly afford to pay more toward your debt, you can bump up the extra amount you’re paying each month, which of course would allow you to pay off your debt more quickly.

Is the debt snowball method right for you?

The debt snowball method isn’t necessarily the most cost-effective technique. In fact, the very similar debt avalanche method will almost always save you more in interest than debt snowball. That’s because with debt avalanche, you pay off your debts in order of highest interest rate to lowest. 

But the reason the debt snowball method may be a good choice goes back to human nature. A study in the Journal of Consumer Research found that people who focus on paying off one debt at a time, and who start with their smallest debt, are more motivated to pay off all their debt. Racking up early small victories gives people the sense of accomplishment they need to keep going.

Even though debt snowball may not save you as much interest as other methods, it will still save you quite a bit if you’re only making the minimum payments on all or most of your debts. Using the debt figures from above, you would save $2,748 in interest and pay off your debt five years and nine months sooner by using the debt snowball method. Which is definitely a good reason not to give debt snowball the cold shoulder.