How to Pay Off Debt Using the Snowball Method
If you’re looking for an easy way to payoff your debt without losing motivation along the way, the snowball method is for you.
Creating a strategic plan to destroy your debt might seem overwhelming, but wouldn't trying to achieve something without a plan be way more chaotic? Once you create your debt payoff plan, your only job is to follow the actionable steps until your debt is gone.
The snowball method is a debt payoff plan that prioritizes your debts from smallest to highest owing balance.
If two of your debts have the same owing balance, choose the one with the higher interest rate. You can request a credit report if you aren’t aware of all of your debts and their exact balances.
But why are you focusing on the debt with the smallest balance?
You’ll most likely be able to pay off your smallest debt faster than your largest, allowing you to celebrate a quicker win. Quick wins are a great reminder of your progress and help create momentum that will essentially push you to the debt-free finish line.
Although being debt-free is great, it shouldn’t be your first goal.
Before aggressively attacking your debt, you need to save up an emergency fund, preferably kept in a HISA for maximum growth. This chunk of money will help prevent you from going further into debt if an unexpected expense or emergency arises (because they always do, don’t they?!)
Why is it called the Snowball Method?
The key element of building a snowball is packing snow onto more snow. The key element of the snowball method is packing previous minimum payments onto the new ones. See how that works? That means if Debt 1 has a minimum payment of $30, and Debt 2 has a minimum payment of $25, then you’ll be putting $55 towards Debt 2 once Debt 1 gets paid off.
A little confused? Let’s see the Snowball Method in action!
Credit card - $470 with a $30 minimum payment
Medical bill - $680 with an $80 minimum payment
Car loan - $16,000 with a $150 minimum payment
Student loans - $20,000 with a $140 minimum payment
Make the minimum payment on all of your debts, EXCEPT your credit card. Pay extra on your credit card until it’s paid off.
Roll the minimum payment from your credit card into the next minimum payment. Now you’ll be paying at least $110 towards your medical bill until it’s paid off.
Roll the $110 from debt two into the minimum payment of debt three. Now you’re paying $260 towards your car each month until it’s paid off and you own it!
Now you’ve got one debt left, and your snowball has grown to $400. You’re paying at least $400 a month towards your student loans, and you can’t remember why you were so nervous about making a plan in the first place.
The Snowball method might not be the most efficient at saving you money, but it’s the method I’d recommend for people that need quick wins to stay motivated or don’t want to put in the extra time and effort of finding the interest rates of their loans. I am both of those people, and there’s no shame in it.
If you don’t need small wins to stay motivated, and you’d rather pay the least amount of interest over the lifetime of your loans, look into the Avalanche Method.