The debt snowball method creates a snowball effect when you pay the minimum on all debts while putting extra toward the smallest balances.
How Does the Debt Snowball Method Work?
The debt snowball method is a debt reduction strategy that has gained popularity for its psychological and motivational benefits.
The debt snowball method approach involves paying off personal debts from smallest to largest, disregarding interest rates. The core idea behind the debt snowball method is to create momentum and motivation through quick wins, making it easier for individuals to stay committed to their debt repayment journey.
Understanding the Debt Snowball Method
To implement the debt snowball method, you first list all your debts from the smallest balance to the largest. This list can include credit card debts, personal loans, student loans, and any other debts. The focus is on the balance amount, not the interest rate. While you make minimum payments on all your debts to keep them current, you throw any extra money you have at the smallest debt to pay it off as quickly as possible. Once the smallest debt is fully paid off, you move on to the next smallest, rolling the previous payment amount into the new payment. This "snowball" effect continues, with each paid-off debt freeing up more money to tackle the next debt, growing larger over time as you pay off each debt.
Psychological Benefits of The Debt Snowball Method
One of the main advantages of the debt snowball method is the psychological boost it provides. Paying off smaller debts quickly can offer tangible proof of progress, which is crucial for maintaining motivation. For many, seeing debts wiped clean from their list relatively quickly is more satisfying and motivating than the slower progress often experienced with methods focused on interest rates.
Example with Credit Card Debt
Imagine you have four credit card debts with the following balances and interest rates:
- Card 1: $500 balance at 18% interest
- Card 2: $2,000 balance at 20% interest
- Card 3: $3,000 balance at 15% interest
- Card 4: $4,500 balance at 22% interest
According to the debt snowball method, you would focus on paying off Card 1 first because it has the smallest balance, regardless of its interest rate being lower than others. Suppose you manage to allocate $200 extra (on top of the minimum payments) each month towards your debts. You would direct this extra payment to Card 1 until it's completely paid off. After Card 1 is cleared, you redirect the $200 plus whatever the minimum payment was for Card 1 towards Card 2, and so on. This strategy simplifies your debt repayment and builds momentum as each credit card debt is eliminated.
Criticisms and Considerations
The debt snowball method has its critics, who often point to the potentially higher interest costs over time than methods like the debt avalanche, which targets high-interest debts first. However, proponents argue that the psychological wins associated with the snowball method can be invaluable for maintaining motivation and commitment to debt repayment.
Choosing between the debt snowball method and other strategies depends on individual preferences, financial situations, and psychological makeup. Some may prefer the mathematical efficiency of the debt avalanche method, while others may benefit more from the motivational boosts provided by the debt snowball method.
The debt snowball method offers a structured and psychologically rewarding approach to debt repayment. By focusing on clearing smaller debts first, individuals can experience quick wins, building the momentum and confidence needed to tackle larger debts.
While this method may result in slightly higher interest costs, the psychological benefits and increased likelihood of sticking to a repayment plan can outweigh these drawbacks for many people.
