What is the debt snowball method?

Living debt-free may sound unattainable, but it's not an impossible goal provided you combine a realistic approach with the right discipline, mindset, and know-how when it comes to spending. 

If you’re looking to tackle debt, you’ve probably encountered or heard of the debt snowball method. It helps to think of a snowball rolling a mountain, growing larger and faster as it goes. The debt snowball method can be a great way to handle paying off multiple different kinds of debt, as well as help you build momentum and stay on track with debt payoff. 

Given that most of us aren’t financial experts, simple strategies are sometimes necessary to pay it off responsibly and efficiently. That’s where the debt snowball method comes in.This method helps you pay your smallest debt off first, then the next largest, and so on until you’re debt free. 

With this method, you focus on the amount of money you owe rather than the interest rate. The main idea here is that paying off one chunk of debt in full will motivate you to continue to pay off the others because you see that you’re making real progress.

Here, we’ll review the basics of the debt snowball method so that you can determine if it's the best approach for reducing your debt.

How to use the debt snowball method

This method of paying off what you owe can be helpful in terms of providing you with a schedule and the momentum to keep going as you cross one debt after another off your list. Here’s where to start.

Step 1: Make a list of debts

Start by making a list of every debt you owe, then organize the list in order from the smallest to largest amounts. If you have a mortgage, don’t include it in this list.

For example, if you currently have three different debts, order them from smallest to largest.

• Credit card: $450

• Auto loan: $3,000

• Student loan: $8,000

Step 2: Continue making minimum payments

Don’t stop making the monthly minimum payments on all your debts, including the smallest one you’re starting out with.

For example, let’s say your minimum payments are as follows.

• Credit card: $40

• Auto loan: $150

• Student loan: $125

To avoid missed payments, late fees and penalties, or even debt collection, keep making these minimum payments throughout the course of your debt snowball approach.

Step 3: Figure out how much extra you can pay each month

Even if it’s only an extra $25, any additional amount toward your debt will help. Put that additional amount toward your smallest debt every month until the debt is fully paid off. 

Or, you could make room in your budget to pay off even more. Let’s say you have an extra $250 per month because you took on a side gig or you focused on cutting down on unnecessary  expenses. Using the example above, start with your credit card debt.Every month, you’ll pay $290 total ($250 + $40 minimum payment) on your smallest debtKeep paying the same amount ($290) each month until you pay off your credit card. The good news here (for this example anyhow), is that it will only take you two months to pay off your credit card, after which you can move onto your auto loan.

Step 4: Move on to the next largest debt

Once your smallest debt is paid off (your credit card, per the example above), move on to the next debt on your list (your auto loan).

This is where the snowball analogy comes in—you’ll pay the same $290 per month on the auto loan plus the minimum payment on that loan, which is $150. So, you’ll be paying $440 every month toward the auto loan.

By doing this, you’ll be able to completely pay off the car in seven months.

Step 5: Continue making your way through your debts

Continue making the same payment you were using for the previous debt (your auto loan) plus the minimum payment of the next largest debt (your student loan) until it’s paid in full. That means you’ll be paying $440 plus $125 on your student loans, which equals $565 per month. 

With that high of a monthly payment, you’ll have your student loans paid off in a year and three months using the example above.

Who should use the debt snowball method?

Although the downside of the debt snowball method is that it takes both work and discipline to stick to, this is generally outweighed by the advantages it offers the right person, especially in terms of the necessary psychological boost to keep going. 

Given that everyone’s financial circumstances and mentalities are different, we can’t promise that this will be the right debt reduction approach for you. But, the debt snowball method can work well for those who need a bit of extra motivation to stick to their long term debt reduction goals, as well as those who have previously found tackling their debt to be an insurmountable task

For those who feel overwhelmed as they wade through their debts, crossing small debts off your list first can help tackling overall debt feel less daunting and more manageable. It also provides a clear, intentional path forward that’s easier to stick to than some other approaches. 

Attempting any debt reduction strategy is an important first step toward becoming debt free. Although, you’ll still have to go through an often challenging process, sticking with it until the end can provide you with greater fiscal stability and a brighter financial future overall.