How the Debt Snowball Method Works
The 6 Steps of the Debt Snowball Method
Here is a step-by-step overview of implementing the debt snowball:
1. List Your Debts from Smallest to Largest Balance
2. Make Minimum Payments on All Debts Except the Smallest
3. Pay as Much as Possible Towards the Smallest Debt
4. Repeat Process as Each Debt is Paid Off
5. Build Your Debt Snowball
6. Continue Until All Debts are Paid Off
Tips to Maximize the Debt Snowball Method
Here are some tips to get the most out of the debt snowball:
- Pay more than the minimum – Put as much extra income as you can towards the small debt to pay it off rapidly. This builds momentum.
- Sell items – Consider selling unused possessions for extra income to put towards debt.
- Pick up a side gig – A side hustle like ridesharing or freelance work can provide funds to speed up payoff.
- Reduce expenses – Find ways to cut back discretionary spending to put those funds towards debt instead.
- Increase income – Ask for a raise or find a higher paying job. More income makes the snowball more powerful.
- Automate payments – Set up automated payments to avoid missing debt payments each month.
- Consider debt settlement – Debt settlement involves negotiating payoffs less than the total owed. This may help eliminate high-balance debts faster. Assess if combining targeted settlement with the snowball aligns with your situation.
The Debt Snowball Method vs. Avalanche Method
The debt snowball method differs significantly from the debt avalanche method, which is another popular debt payoff strategy.
With the avalanche method, you focus on paying off the debt with the highest interest rate first, regardless of the balance size. This allows you to save the most money on interest charges over time. The avalanche method takes a more mathematical approach – you pay off debts in order of interest rate, from highest to lowest.
In contrast, the debt snowball method ignores interest rates and instead pays off the smallest balance first. This gives you quick wins to stay motivated, building momentum as you move to the next largest debt.
So which method is better? Each has pros and cons:
Debt Snowball Method
– Provides motivation through early small wins
– May cost more in interest expenses
– Not mathematically optimal
– Risk of slipping up before larger debts paid off
Debt Avalanche Method
– Saves the most money overall
– Mathematically optimal
– Gives sense of financial control
– Takes longer to see initial results
– Less motivation without quick wins
– Requires focus on math over psychology