The “Debt Snowball” is one of the most popular methods for approaching a variety of debts, with the intention of paying them off. The process has existed for as long as debt has been around, but the method has been commoditized, packaged, and popularized by a variety of personal finance experts, gurus, and speakers. Dave Ramsey is the biggest proponent of this method, having written extensively about the success he has seen as a result of paying off debt while adhering to the Debt Snowball method.
I’m not a fan, but the Debt Snowball method and its proponents get a few things right.
Dave Ramsey is correct in that those who stick to this plan are more likely to reach their goal of paying off debt than those who do not think about and create a road map. Furthermore, I applaud Dave for admitting, although in fine print often missed by followers, that the Debt Snowball method is less efficient, more expensive, and slower than other methods. Many of Dave Ramsey’s disciples, both successful and not, accept Dave’s reasoning for the promotion of the Debt Snowball above other methods, despite not having considered the alternatives.
However, as the Debt Snowball method has been proven to be successful, it’s worth outlining the process for anyone who is looking to pay off debt.
The Debt Snowball
The Debt Snowball is a method of prioritizing a collection of debts. This collection could include credit cards, loans, a mortgage, anything with a monthly payment, but it is most often associated with credit card debts. Credit cards are usually easy to illustrate because at any particular time for each credit card, you know what the balance is, you know what the interest rate is, and you know what your monthly minimum payment is.
Starting the Debt Snowball process relies on having more than enough cash flow to meet more than just the minimum payments to your debts each month. If you can’t pay the minimum payments, you must talk to your creditors to change your terms, earn more money, or a combination of both.
Prioritize your debt accounts from smallest balance to largest balance. The core philosophy of the Debt Snowball method is that it’s better from an emotional perspective to pay off small balances first. When that first, small debt is paid off, it provides a psychological boost of a “quick win.” That, in theory, motivating adherents to continue along the path of paying off debt.
To pay off debt using the debt snowball method, you make the minimum payment to each debt except for the debt ranked first on your list. To this most important debt — defined by the Debt Snowball method as the debt with the smallest remaining balance — you pay the minimum plus any extra cash you have budgeted for accelerated debt repayment. This extra payment could be the remainder of your monthly after-tax, after-savings income, it could be your cash flow plus a transfer from your savings, or it could be a set dollar amount each month. Regardless of the amount, you throw this extra money to your prioritized debt until it is paid off, then the next month you take the same minimum payment you were paying to that first debt, add your extra cash flow, and pay this larger amount to the second-most important debt. (And that second-most important debt is now the first, because the original first has been eliminated.)
Keep in mind that some loans treat these extra payments differently. It’s best if you contact them to ensure your payment will go to the loan’s principle. Furthermore, if you intend to use this method with your mortgage — often an individual or household’s largest debt — you should ensure you are not penalized for making larger payments.
- To start, you need: enough cash flow to handle at least your minimum monthly debt payments.
- Prioritize your debt by: remaining balance, from low to high.
- Each month: pay the minimum payments plus extra to your top-ranked debt.
- Celebrate when: each debt is paid off, and prioritize the next debt account.
The Debt Snowball ignores the interest rate, the real cost of any particular debt. Even if a small debt is less expensive than a large debt, it’s prioritized higher. This is where a perfect follower of the Debt Snowball method will end up paying more in interest fees than a perfect follower of a method that prioritizes debt by interest rate, like the Debt Avalanche. (As far as I know, I was the first person to call this method the Debt Avalanche, but its name is taken unabashedly from the Debt Snowball).
The Debt Avalanche method is mathematically superior. Anyone who adheres to this method will pay off debt faster and pay less money than anyone who adheres to the Debt Snowball method. This adherence is what gurus like Dave Ramsey focus on. The Debt Snowball is more likely to see success because of the psychological boost of a “quick win.” The truth, however, is that the same psychological boost can be created with the Debt Avalanche. Depending on the configuration of debt, the first “quick win” may not be delayed much, first of all. Additionally, a simple motivational technique will often suffice — rather than celebrating the first full debt payoff, celebrate a milestone, like the first $1,000 paid off or the first $10,000 paid off. Whatever it takes to motivate you, you shouldn’t be confined to the particular parameters of the Debt Snowball method. If this type of motivation is important to you, make it yourself — it will be more meaningful.
Use this debt snowball calculator to compare the snowball and avalanche payoff methods.
Plus, just the knowledge that there is a method that will cost less and take less time than the Debt Snowball is enough motivation for some. While gurus sometimes freely admit that the Debt Snowball is inefficient, the message doesn’t get across to all students, and some might feel thoroughly disappointed when they discover they could have spent less money and less time in debt with just a simple shift in priorities.
Subscribing to any method of getting out of debt is a positive thing. No matter what you choose, just thinking about the process and creating a plan is much better than approaching debt repayment haphazardly, and it’s infinitely better than doing nothing at all. I’m all for anything that gets people paying off debt and becoming financially independent. I think it’s a disservice to preach a certain approach without addressing the alternatives.
In fact, I prefer a hybrid method to repaying debt, one that looks at more than just balances and interest rates, particularly when an individual’s debt load is a variety of borrowing types.
Have you had success paying off debt with the Debt Snowball method?
Updated March 24, 2017 and originally published August 29, 2011.