Many Americans are faced with large amounts of debt. Especially when it comes from multiple sources, it can quickly get complicated; finding a method that breaks it down easily is essential. The Snowball Method is a popular choice that offers a unique blend of benefits and drawbacks.
The Debt Snowball Method focuses on paying off the smallest debts first while only meeting the monthly minimum requirements for larger debts. This is to give the sense of progress and tackling issues while paying off debt. The method boosts motivation at the expense of paying more in total interest.
There are plenty of reasons to consider the Snowball Method for paying off debt. For a deep dive into all of its benefits and drawbacks, as well as deciding if it is right for you, continue reading below.
What is The Debt Snowball Method?
The Debt Snowball Method is a structured way of tackling debt. While it often shines the brightest when tackling large amounts of debt, it is applicable for anyone looking to pay off any amount of previous loans.
The Snowball Method requires you to list all of your debts out from smallest to largest. Then, the bulk of your payments should be done on the smallest amount. Of course, minimum payments on all of your loans should still be met to avoid additional problems later.
As with any plan of attack against debt, the Snowball Method has its own benefits and drawbacks. We will cover them in more detail in later sections, but the basics come down to motivation.
With this method, you are likely to pay more in total – statistically, it is a worse option than other popular choices such as the Avalanche Method. However, the good feelings and motivation that come from seeing the number of debts go down often motivate people to continue creating good financial habits.
The psychological benefits of seeing debt disappear should not be overlooked. Plenty of studies have shown the adverse effects of suffering from debt – any small wins you can get should be taken.
When The Snowball Method Shines
The Debt Snowball Method can be used for any amount of debt from any number of sources. However, it is especially potent for people suffering from a large number of debts. When combined with other good financial habits like creating a budget, it is a great way to take control of and pay off loans.
If you often feel anxious about debt or unsure of how much you owe (and to whom), the Snowball Method will likely be highly effective. This starts even at the very first step: creating a list of your debts and organizing it. It continues with the motivational wins that occur for each different account you pay off.
How to Create Your Debt Snowball Method
If you’ve decided to go with the Snowball Method for dealing with debt, it is now time to personalize your plan. As outlined above, getting started is pretty simple – all that is necessary is a list of your current debts and their amounts.
It is important not to overcomplicate things. While we will explore a few different ways to create your Debt Snowball Method here, remember to keep it simple. Finances can quickly get overwhelming; if you feel that things are becoming too much to track, go back to basics and ignore the rest.
To Create Your Debt Snowball Method:
- Gather and organize all your debt.
- List the debts from smallest to largest.
- Make minimum payments on all debts.
- Take extra budgeted money and put it toward the smallest debt.
- Repeat.
The Snowball Method is reliant on setting a budget for your debts each month. The budget should be enough to cover all minimum payments and contribute at least a little extra. The more you cover each month, the quicker debts disappear.
This can be challenging if money is tight, so do not be afraid of keeping it small. Every penny counts, and all extra payments above the minimum will reduce debt.
One essential part of the Snowball Method is the payments toward debt growing “larger.” This is where the term “snowball” comes from – it may be helpful to imagine one rolling down a hill, collecting as it goes.
At the top of the hill, you do not need to add snow – your initial ball will grow without you running alongside, packing more on. This growth is represented by extra cash going toward debt. If you set aside $500 per month to pay off debts, keep it at $500 – even after the first loan is paid off. That way, future loans get paid off even quicker.
Of course, if your income goes up or you can put more toward the snowball, it is likely worth doing so. The key is to not take away money from paying off debts just because you have less to pay off. Ride the high of closing accounts all the way to freedom!
Use a Calculator
Depending on how many debts you have, compiling your first list can be a daunting task. Fear not – there are plenty of online calculators or Excel worksheets that can help you organize everything. While some of them can get complicated, you can just focus on the basics. Good-to-have information includes:
- The total debt
- Interest rate
- Minimum payments
This helps organize all of your information at every stage – from setting the budget to ticking off final payments. Plus, tracking your finances is a good idea anyway. You will be able to see your progress much easier.
The Benefits of The Debt Snowball Method
We have touched upon some of the benefits of the Debt Snowball Method already – most of them being psychological wins. Truthfully, almost every benefit the Snowball Method has fits into this category.
Some of the benefits of the Debt Snowball Method include:
- Builds motivation
- Easy implementation
- Builds good money habits
- Reduces time spent thinking about debt
Each of these can have a profound effect both on remaining debt and general financial health. It can be easy to look at money as a purely statistical thing, but its effects on our minds cannot be ignored. Our interactions with money are so embedded in us that there is even a specific field of study dedicated to it: behavioral finance.
The field covers quite a bit about the general market and includes critical studies into the psychological biases we place on money. Every benefit the Snowball Method introduces helps to make the rest of the journey easier.
Easy Implementation
When compared to some other methods for tackling debt, the Snowball Method is straightforward to implement. Getting started can be done in only a few steps, and the system only grows simpler as debts are reduced.
To start with the Snowball Method, just:
- List out all current debts
- Organize them from smallest to largest
- Pay off the minimum balance on all loans but the first
- Put the rest of the money toward the smallest loan
That’s it! As time goes on, the smallest loan will eventually disappear and be replaced with the next one up. The hardest part of the whole process is likely to be listing out and organizing all your current loans – which leads to the next benefit of the process.
Building Good Money Habits
Like any plan to cull debt, the Snowball Method forces you to build better money habits. Starting even from the first step of listing out your current debts, you are required to look at what you actually have to pay off.
For many people, having that total amount in front of them can be scary. However, the Snowball Method does a great job of breaking down the amounts into manageable, bite-sized pieces.
While it may not seem like it, the ability to break down finances into digestible bites is huge. In addition to effectively paying off debt, it is also used for investing and saving money. The Snowball Method encourages you to budget around manageable numbers and spread them to other areas of your financial health.
Rewards Time
This is another critical psychological benefit of the Snowball Method. Debt can become crushing in so many ways – one area that is often ignored is time. The more debts you have to pay off, the more time you will spend thinking about it.
As previously discussed, these thoughts are often stressful and negative. Cutting down the number of debts you have cuts down the planning and thinking you have to do. This shows up as additional time spent away from dreading finances.
Reducing your total sources of debt from even four to three can have a profound impact on your stress levels and overall happiness. Plus, the plan made at the beginning of the method can provide some reassurance whenever you need it.
The Drawbacks of The Debt Snowball Method
Sadly, no method is without its faults. Despite all of the major psychological wins the Snowball Method has, it does fall behind others statistically. Using the Debt Snowball Method, you are more likely to:
- Take longer to become debt-free
- Pay more money overall
While the list of drawbacks is small – you are still paying off debt, after all, a fundamentally good thing – these can be significant factors. To many people, the point of paying off debt is to pay the least amount of money possible. The Debt Snowball Method is not the best for that.
If you care more about paying off debt as quickly as possible rather than as painlessly as possible, the Snowball Method may not be for you. This is likely true for quite a few people who enjoy statistics or want to reach the end of the road as quickly as possible.
These differences are most highlighted when comparing the Snowball Method to the Avalanche Method. Both are wonderful options for paying off debt, but the drawbacks and benefits flip. Luckily, there is no wrong answer to debt pay-off methods. So long as the balances are going down, you are likely doing something right.
How To Decide If The Snowball Method is Right For You
With the benefits and drawbacks listed out, it is time to decide whether the Snowball Method is the right choice for you. Ultimately, this often comes down to your situation. Everyone’s required payments, total debts, and available cash will be different.
Even more relevant to this choice is a person’s views on money. If you struggle with staying disciplined with money or are looking for a win in the financial space, the Snowball Method will serve you wonderfully.
On the other hand, if you can buckle down and want to pay as little as possible, you may grow frustrated at the high interest rates you are neglecting. Either is OK!
Luckily, there is no need to stick strictly to one kind of debt option, either. Try out the Snowball Method for a little while and see how you feel – you can always switch later. Alternatively, mixing different methods can be a good idea for people looking to get more involved in their planning.
For example, you could consolidate your list of debts by smallest to largest and then create another list organized by interest rate. Comparing the two, you could find the quickest way to avoid high interest rates while still completing different debts.
While choosing a method, remember that simplicity is often a great benefit while reducing debt. Dave Ramsay, one of the most popular financial gurus on the planet and a proponent of the Snowball Method, often places a focus on the human condition of money. Keeping complex issues simple is a great way to keep them manageable.
Other Factors in Deciding
There are plenty of other minor factors that hold influence over whether or not the Snowball Method is right for you. Each person’s journey to being debt-free is different; with that said, there are a few common considerations that may connect different people.
Among the other factors to consider when choosing a method are:
- The current market
- Available savings
- Current offers (i.e., 0% APY or delayed interest)
- Income
As you can see, plenty more than just the amount owed and the interest rate factor into how to best pay off your debt. Luckily, the Snowball Method can effectively deal with all of the variables; those with more may just have to spend a bit more time in the planning phase.
One of the key factors that can influence debt payment is the current stock market. Sometimes, your likely return on investments can be higher than the interest rate on your debts. If this is the case, it may be a better option to invest and pay less into the debt.
Of course, if this happens, it is still vital to meet minimum payments on everything. Otherwise, debt can quickly spiral out of control once again. This also runs counter to the Snowball Method, as it takes money away from hitting those small wins.
As with everything in debt removal, there are plenty of options. You could also split the amount in any number of ways to still quell the debt and hedge your bets in savings.
Current offers can dramatically change the way you approach debt. If, for example, you have a loan currently accruing a 0% interest rate, you can decide between rushing that one down or putting it on the backburner. The Snowball Method dictates relying only on total debt amount, but factors like this are essential to consider. The psychological benefits of seeing 0% interest on a loan can also be exciting.
Consider Your Income and Available Savings
Two of the largest factors in determining what method works best for you are income and savings. Income is simply the amount that you earn every year or month. It is crucial here because it dictates how much you can actively put toward debts.
For example, if you earn $3,000 per month and spend $2,000 on average, you may decide that you can comfortably pay off $600 of loans each month. Being able to do these calculations is vital to paying off debt and making a Snowball Method plan.
Savings are important to consider in both the present and future sense. You may have a significant amount of savings that you simply have not donated toward paying off debt. Moving some of that money into debt payments may immediately allow you to cut off a debt source, providing a great sense of relief.
More likely, however, savings are important to consider for the future. While aggressively paying off your loans is a good idea, it is vital to still maintain a good emergency fund. While setting up your budget (a vital step to financial health), also make room for keeping some liquid cash.
Knowing how much you currently have available will help you plan better and see what you can devote to paying off debts – regardless of what method you choose.
Recap
The Debt Snowball Method is a helpful way of organizing and effectively paying off debt. Rather than focusing on pure numbers, the methodology highlights the wins and helpfulness of paying off loans. It does this by targeting the smallest loans first and then working up to the largest loans – regardless of interest rate.
The benefits of the Snowball Method are well documented, and it can be extremely helpful for anyone struggling to pay off debt or organize their finances. Combined with other good financial habits, it is a great way to handle any amount of debt.