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The Debt Snowball

This article was written by in Debt Reduction. 17 comments.


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.

Debt SnowballThe 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 summarize:

  • 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 Snowball. 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.

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?

Published or updated August 29, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 17 comments… read them below or add one }

avatar STRONGside

The debt snowball really is a powerful tool. My wife and I used it successfully to pay off a small balance credit card, an auto loan, a student loan and now working towards our mortgage. The concept is very simple, but often times in personal finance, simple is powerful!

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avatar Chris

One thing I like about the Debt Snowball is it also cuts down on your admin time dealing with your debt. Assuming you’ve made the decision to either close accounts as paid off or at least not use them to incur more debt, each account payoff is one less bill to receive and one less date to keep track of. It’s a small thing but it appeals to me :-)

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avatar wylerassociate ♦162 (Cent)

I don’t read or listen to dave ramsey so I don’t know what the debt snowball is. I had credit card, student loan & personal loan debt. I focused on paying off each one with the smaller balance & now my student loan, person loan is paid off. Now I’m all about paying off my credit card debt.

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avatar Steve Stewart

I agree that the Debt Snowball method is not as efficient. But the success of my clients tells me that if they don’t knock out those small “quick-win” debts then they get discouraged and tend to quit a debt elimination program.

However, there are times when I coach my clients to move something out of the Debt Snowball order of smallest-balance to largest-balance. It really has to do with my clients desire to make progress and to get something out of their lives. It might be a variable-rate loan or money owed to a family member (which hurts the relationship). Again, this is to help keep them motivated so they don’t give up.

I recently interviewed Eric Lentz (MoneyPlan SOS podcast episode #28) who created the Debt Snowball Calculator. It helps by showing (in a big red number) how many months it will take to pay off the debts, one at a time. This also helps keep people motivated and, if we switch things around a bit, will show them how much faster or slower they will eliminate each debt. Very cool tool.

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avatar Jon

I agree with Steve. There is a gentle balance that needs to be found between getting a “quick fix” psychological high for a short period of time, and from make the most efficient decisions.

Every situation will differ, and individuals will perceive success differently also, but I like the idea of showing people on paper exactly what the differences will be.

Even for me, taking out my first mortgage I disliked the idea of making any more payments than neccessary, but by looking at the numbers on paper and comparing to 30years of making one extra payment a month I was able to visualize the difference it would make.

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avatar shellye ♦107 (Cent)

I used to listen to Dave Ramsey religiously, but not so much anymore. I’ve been to his one-day seminars and they’re very informative. I think Chris is right; following the debt snowball plan cuts down on the time you have to deal with the debt. I have only been in a debt snowball situation a couple of times in my life and found that once you paid off a creditor, the mental stress is lessened and your mental energy is freed up to focus on something else.

It takes a huge amount of willpower to follow DR’s plan as he advocates it on his radio show. You can only eat ‘rice and beans’ for so many days until you just say “ENOUGH”.

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avatar Anthony

I’m not a follower of Dave Ramsey. But when I paid off my debt, I eventually followed something similar to the “Debt Snowball” method.

I think that there are two big benefits that opponents of the method ignore.

1. Many PF bloggers don’t like “Debt Snowball” because it ignores interest rates. This is very true. My personal feeling? If you are emotionally and pyschological able to focus on interest rates, then go ahead and do so! Most people who have debt, however, got into debt because they are unable to control their spending habits. A quick win by paying off a smaller debt is huge in this instance!

Corollary to 1. As I mentioned, I didn’t strictly follow the method. Of course, it doesn’t make sense to pay off an $8,000 student loan @ 2.5% before $9,000 of credit card debt at 19.99%. Some common sense goes a long way. A modified “Debt Snowball” approach would be useful, whereby you weigh in interest rates for balances that are very close to each other, as in the example I have provided.

2. The bigger benefit, I think, is that once you’ve paid off a smaller debt, this creates cash flow for you. If you have a student loan debt of $5,000 @ 2.5% and a consumer loan of $25,000 @ 8.0%, depending on how much you’re paying each month, it could take you years to pay off your consumer loan! If you pay off the smaller debt first, it could be paid off in a few months! The plan, of course, is to snowball these monthly payments. BUT! If you do get into a jam, this excess can become cash flow for you.

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avatar Dave B.

Yes, exactly! While the debt snowball may be a bit more expensive in the long run, building cash flow quickly is key to managing the risk of owing debt, especially in times of high unemployment and inflation. So long as one works for someone else for a living, one is at risk of a layoff reducing or eliminating income. The sooner cash flow can be increased by paying off one of the loans, the sooner that risk starts to subside.

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avatar Aaron

Hey Flexo – I’m a proponent of the method. And, it’s worked for me. As we all know, money issues are more than physical. They are tied to the emotions. It’s really encouraging to see when you are able to pay off the debt (smallest one first) in the short term.

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avatar Mark

(My method is proven to reduce interest cost no matter what your situation is)
It gets more complicated with more than 2 loans, but I could probably figure it out

I have two student loans of about 15k at 6.25% and 6.5k at 5.0%.
The minimum payment for 15k loan is $227
The minimum payment for 5k loan is $73

Using Mint.com and its loan goal estimator, you can change montly payments to determine how much interest is saved and how much shorter it will take to pay off the loan.
You do 1 loan at a time and get a range of payments, say 227, 300, 500, 750, 1000 for the $227 loan and 73, 100, 250, 500 for the $73 loan capturing the interest saved for each on an excel sheet. Then create a fitted equation from each graph. Use each equation and link up the x values from a total amount (example – $1000 a month) Then add up y values for a specific x value to get total interest saved. A maximum is achieved and this is the optimal payments. So for my loan I can do about $783 and $217 which achieves the most money saved. It takes no more than 30 min and can save thousands in interest.

If you have 3 or more loans then it gets much more complicated. I’d probably have to do differential equations or some type of matrix to get it done (or a whole bunch of guess and check in excel)

What I described is pretty simple for 2 loans. I could provide an excel sheet if interested. It only works with Mint.com (or with excel if you know the exact terms of the interest, principle, etc)

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avatar Randy Barnett

One seldom considered option is to “refinance” higher interest debt. Some credit card companies will negotiate or you can “surf” to another card. If all of your cards are the same rate, the snowball vs avalanche argument goes away. (It also goes away if you’re debt free)

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avatar Cejay ♦1,521 (Half-Dollar)

We did the debt smowball to get out of debt. It was so encouraging to have one debr paid off and then to start on the other. It may not be the best method but I am living proof it works.

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avatar Jackie

I’m a proponent of the method, because it’s very motivating — and motivation is something you need for sure if you’re getting out of a pile of debt. The lowest balance method seems to be the most popular, because of the quick wins, but you can do a debt snowball with debts organized in other orders too. It’s still a snowball, because your payments snowball over time. It’s just important to know yourself well when deciding on the order you want to repay your debts in.

If you tend to get discouraged easily, lowest balance is usually good. If paying even an extra penny more in interest would drive you nuts and you’re good at sticking to things for the long term even if they’re hard or boring, then highest interest first is probably right for you. Then there are the exceptions — like if you’ve got a debt to a relative that you just really, REALLY want to get paid off asap. In that case your debts might be in some other order entirely.

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avatar Julie @ The Family CEO

I’m for whatever plan will work for that particular person, and I agree with Dave — and others in these comments — that a person deeply in debt probably isn’t motivated by the mathematics of finance. The psychology of big wins has worked for thousands and thousands of people and the strength of the Debt Snowball plan is the simplicity of it.

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avatar qixx ♦1,890 (Half-Dollar)

When i first started looking at debt repayment methods the debt snowball and debt avalanche put my debts into the exact same order. As my interest rates went down the balances went up. When adding my wife’s balances when we got married the order still matched. I wonder how common an occurrence that really is. Either way i can wholly support the debt avalanche and debt snowball methods as i am working through both.

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avatar lynn ♦155 (Cent)

When we were raising our family we had 75000 (yes 3 zeros) in medical debt. I made arrangements with each of the providers, got a pt job and paid it off in 2 years – the smallest one first. I guess this is snowballing, but it didn’t exist back then. I could have been famous if I wrote about what I did! LOL

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avatar Matt Bell

Flexo – I just wrote about this as well over on Wisebread (http://www.wisebread.com/a-comprehensive-guide-to-the-debt-snowball-method-0). One point lots of people miss, though, has to do with the other debts – the ones where you are paying the “minimum” while you accelerate your payments on the lowest balance debt. It’s really, really important not to pay the minimums, since the minimums will decline a little each month. You need to pay the “fixed minimums” – the same amount every month. That’ll get you out of debt a lot faster.

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