What is the Debt Snowball Method?

There are many ways to tackle debts and reach financial freedom. A popular debt management strategy is the debt snowball method. This strategy provides tips and guidance on how exactly to tackle multiple debts so you can gain ground and stay positive. 

Let’s go over all about the debt snowball method, what it is, how it works, examples, the pros and cons, and how to determine if this plan is the right one for you.

What is the Debt Snowball Method?

The debt snowball method is a debt repayment strategy that involves paying off your debts in order of smallest to largest amounts. This is different from other methods because you don’t consider the interest rate of each debt, just the total balance owed for each. 

You start by making minimum payments on all your debts but paying extra toward the debt with the smallest amount first to pay that debt off faster. After the smallest debt is paid off, you move on to pay extra to the next smallest debt, and then the next smallest debt, and so on and so forth. 

How the Debt Snowball Method Works

Simply put, the debt snowball method works by paying down your debts in order of smallest amount to largest amount. Start the process by first listing all your debts from smallest to largest amounts, then list the minimum payments required for each debt. Next, budget to pay extra on the smallest debt amount until that debt is gone. Then put everything you paid toward the first smallest debt to the next smallest debt. Keep doing that until all your debts are repaid. 

Step 1: List debts from smallest to largest amounts

To start using the debt snowball method, the first thing you need to do is list all your debts in order from the smallest to the largest balance amounts. Don’t worry about the interest rates right now, instead focus only on the total balance owed for each debt.

This helps you to stay focused on an aspect of your debts that is easier to calculate and understand as you create a plan of action for quick debt repayment progress.

Step 2: List minimum payments required for each debt

Once you've organized your debts by balance, it’s time to list the minimum payment required for each one. Regardless of what debt repayment plan you use, you always want to first make a plan to make the minimum payments.

Then, if you’re using the debt snowball method, you’ll focus extra efforts on paying off the smallest one first. This step ensures you stay current on all obligations and avoid late fees or penalties.

Step 3: Pay extra on the debt with the smallest amount

Now, that you have your debts listed and a plan to tackle the minimum payment requirements, it’s time to make a plan for paying extra money toward the smallest debt while continuing to make the minimum payments on the others.

By focusing all your extra financial resources on the smallest balance, you’ll be able to pay it off faster. This creates a psychological win as you’ll pay off this smaller loan the fastest, which will help you stay positive and motivated to keep going!

Step 4: Add all you paid to the smallest debt to the next smallest debt's payments

Once you’ve paid off your smallest debt, take the total amount you were paying on that debt (the minimum payment + any extra payments) and apply it to the next smallest debt. This creates the "snowball" effect, as you’re now using more money to pay off larger debts while maintaining the minimum payments on the others.

This snowball effect that gives this strategy its name is essentially a way to compound your debt payments, making your payments gradually bigger as you tackle bigger debts. How much you’re spending on debts overall also remains the same until all of your debts are repaid in full. 

Step 5: Continue until all debts are paid from smallest to largest amounts

Continue this process of rolling the payments from each paid-off debt into the next one, gradually increasing the amount you’re paying toward each larger debt. As your snowball repayment amounts grow, you’ll gain momentum and be able to pay off your debts faster. 

This method not only helps you clear debts but also builds financial discipline along the way, keeps your overall budget for debt payments the same, and helps you stay positive as you tackle the smaller debts first. 

Example of the Debt Snowball Method

Everyone’s situation with debt is going to be unique. How many debts you have, their amounts, their interest, and their minimum payments are all going to be different for each person. But we can provide a simple debt snowball example to help you understand how the process works so you can easily apply it to your own finances. 

Step 1: List debts from smallest to largest amounts

First, let’s say you have 3 different debts, and if you list those debts from smallest to largest amounts, you’re list will look like this: 

• $100 debt
• $200 debt
• $300 debt

Step 2: List minimum payments required for each debt

Second, you want to list the minimum payments required for each of your 3 debts. In our example, the minimum payments would be listed like this: 

• $100 debt ($10 minimum payment)
• $200 debt ($20 minimum payment)
• $300 debt ($30 minimum payment)

Step 3: Pay extra on the smallest amount

Third, make a financial plan to pay extra, or more than the minimum payment, on your smallest debt. That way the smallest debt will get paid off faster then if you only pay the minimum amount required. For you, this extra amount could be anything, but for our example, we’ll pay an extra $10 on the smallest debt, like this: 

• $100 debt ($10 minimum payment + $10 extra = $20 total payment)
• $200 debt ($20 minimum payment)
• $300 debt ($30 minimum payment)

Step 4: Add all you paid to the smallest debt to the next smallest debt's payments

Fourth, you’ll now pay off that smallest debt faster, and once that first debt is completely paid off, you’ll take the total payment for the first debt and add that as your extra payment for the next smallest debt, like this: 

• $100 debt ($10 minimum payment + $10 extra = $20 total payment) DONE!
• $200 debt ($20 minimum payment + $20 extra)
• $300 debt ($30 minimum payment)

Step 5: Continue until all debts are paid off

Lastly, continue this same process of rolling your debt payments as you focus on the next smallest debt on your list until all your debts are repaid in full. At the end of this debt repayment journey, your debt repayment plan might look something like this: 

• $100 debt ($10 minimum payment + $10 extra = $20 total payment) DONE!
• $200 debt ($20 minimum payment + $20 extra = $40 total payment) DONE!
• $300 debt ($30 minimum payment + $40 extra = $70 total payment) DONE!
• ALL DEBTS PAID OFF!

Snowball Method Pros and Cons

Using the debt snowball method is a great way to quickly meet goals at the beginning of your debt repayment journey. By paying off the smaller debts first, you’ll meet your first goals faster, which can help you stay positive and stay motivated!

Debt Snowball Pros

• Quick wins. By paying off the smallest debt first, you’ll finish paying off one of your debts faster, leading to a quicker victory in your overall debt repayment journey. 
• Keeps you motivated and positive. These quicker wins by tackling the easier to pay off debt amounts first can help you stay motivated to keep going and stay positive along the way.
• Simple and easy strategy to follow. This method doesn’t involve a ton of math or complicated calculations, making it one of the easier and simpler debt strategies to follow.
• Builds a healthy momentum. As you pay off each debt, your extra payment for the next debt gets bigger, helping build a healthy momentum forward so your debts get paid off faster and faster. 
• Total amount budgeted for debt repayments stays the same throughout. Because you’re just rolling over extra payment amounts, the total amount you are spending toward debt repayments remains the same throughout this process. 

Debt Snowball Cons 

• Doesn’t consider the interest rates. Interest can play a big factor into how your debts passively grow bigger, so taking interest into account may be an important part of keeping your debts down.
• Not necessarily the best option for high-interest debts. If you have a debt with a very high interest rate, then it may be in your financial best interest to actually tackle that debt first, regardless of where it falls in the list of smallest to largest debt balances. 
• Requires extra funds beyond the minimum payments. This strategy requires you to have extra money in addition to the minimum payments, which may be difficult depending on your financial situation. 
• Can take longer. While you do have quick progress on smaller debts with this method, larger debts may take longer as you wait to tackle them with extra payments until your smaller debts are out of the way.

Debt Snowball vs Avalanche Methods

The debt snowball and debt avalanche methods are both debt repayment strategies to help give you a plan for how to tackle your debts. But they both go about tackling debts in different ways with different benefits to each strategy. 

The main difference between the debt snowball vs the debt avalanche methods is that the debt snowball tackles debts from smallest to largest balance, while the debt avalanche tackles debts from highest to lowest interest rate.

The Debt Snowball Method

There are many advantages to using the debt snowball method, including quick wins by paying off smaller debts fast. But if you have higher interest debts then you probably want to consider the debt avalanche method instead.

• Pays off debts in order from smallest to largest balance amounts.
• Quick wins from eliminating smaller debts first.
• Potentially higher overall interest costs.
• Can take longer to fully pay off debts.
• Not the best method for tackling high interest debts.
• Easy strategy to follow with only simple math involved.

The Debt Avalanche Method

There are many advantages to using the debt avalanche method, especially if you have high interest debts and want to save on interest costs by tackling those debts first. But this method involves a bit more complicated calculations to make sure you’re payments are beating interest rate growth for maximum savings. 

• Pays off debts in order from highest to lowest interest rates.
• Long-term savings by reducing interest payments first.
• Lower overall interest costs.
• Can take less time to fully pay off debts.
• Best method for tackling high interest debts first.
• Requires some more complex calculations with interest rate percentages.

Is the Debt Snowball Method Right for You?

The debt snowball method works best if you're motivated by quick wins and want to see progress fast. By paying off the smallest debts first, you get the satisfaction of clearing debts early, which can help you stay focused. However, if you're more concerned about paying the least amount of interest, this method may not save you as much money over time as other methods, like the debt avalanche.

To decide if this method is right for you, ask yourself:

• Do I need small victories to stay motivated?
• Am I more focused on eliminating debts quickly rather than saving on interest?
• Would seeing progress with my smallest debts help me stay on track?
• Do I have extra funds I can put toward the extra “snowball” payment?

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This content is not intended to substitute credit counseling. Consult with a qualified financial advisor who can assess your unique financial situation and provide appropriate recommendations for personalized financial guidance.