The debt snowball strategy
Quick insights
- The snowball method for debt repayment reduces your total debt by focusing on eliminating the smallest balances first.
- Applying this repayment strategy encourages you to determine an extra amount you can put toward a loan, and that amount can snowball each time you pay off a loan.
- You may find it helpful to your financial health to apply a debt repayment strategy to help you pay down your debt.
When you hear “debt” and “snowball” together, it might sound like a bad combination, but that’s not the case. The snowball method could help you repay your total debt, one loan, credit card or line of credit at a time.
What is the debt snowball method?
The snowball method is a debt repayment strategy that involves paying all your debts in order of smallest to largest. In short, you create financial momentum by paying off one loan or credit line at a time. When a loan is paid off early, you can save money on interest. However, each debt you pay off with the snowball method can motivate you to continue reducing your total debt.
How does the debt snowball work to pay off debt?
Paying off smaller debts can help tackle larger debts by freeing up money in your monthly budget to do so. Each time you pay off a loan, your budget may allow you to put more toward another loan. This is the debt snowball effect that always has you committing extra money toward paying down a balance. With some consistency, you can become debt-free, one loan or line of credit at a time.
Steps to pay debt with the snowball strategy
- List all your current debts, including loans, credit cards and other lines of credit.
- Sort the list from smallest to largest outstanding balance.
- Budget so that you can make at least the minimum monthly payment on each debt.
- Decide how much extra money you can comfortably add towards paying down your smallest debt each month.
- Pay the extra amount, in addition to the minimum amount due, until the smallest debt is paid in full.
- Repeat steps 3-5 for the next largest loan in your original list until every debt is paid off.
Example of the debt snowball effect
- You have three loans—let’s call them Loan A ($1,000), Loan B ($5,000) and Loan C ($3,000).
- With the snowball method, you’d pay off Loan A, then Loan C, and then Loan B.
- While budgeting to pay at least the minimum on all three loans, calculate how much extra money you can apply to Loan A.
- You’d make the minimum and extra payments to Loan A until it is paid in full, then roll all or a portion of what you were paying into paying extra toward Loan C. This particular step is repeated for Loan B after Loan C is paid off.
How to eliminate debt with the snowball method
Your monthly budget can play an important role in applying the debt snowball method, especially at first. A key step is deciding how much extra money you can apply to a loan. It’s fine if the extra amount you put toward your debts varies from month to month—making payments on a regular basis is what's important.
With each debt you pay off, the extra amount you can apply to your next largest loan can increase. This extra amount you’re able to apply can help snowball your progress toward paying off your final debts.
Can I combine the snowball method with other financial strategies?
The snowball method is one financial strategy specific to paying down debt. You’re free to explore and use other ways of managing debt that fit your goals and situation. For example, the avalanche method for repaying debt emphasizes paying debts with the highest interest rates first. Consolidation loans and balance transfers may also be useful tools for debt repayment.
In summary
When applying the snowball method, you pay off each debt you have from smallest to largest balance. The central part of the process is putting extra money toward your smallest debt until it is fully paid off. As each debt is paid, you add the amount you were paying toward paying the next smallest debt. Continue this process, rolling over (or snowballing) money used for loan payments to your larger debts.
Becoming debt free can be very rewarding, but then have you asking what’s next. After you pay off debt, you can use any extra money now available in your budget to build your savings and achieve other financial goals.
