The Secret to Paying Off Debt When You Need a Quick Win and a Serious Boost
Editor’s Note: This story originally appeared on Penny Hoarder.
Two major methods dominate the debt settlement landscape: the debt snowball and the debt advance.
Another approach prioritizes paying off the debt with the highest interest rate first — reducing interest payments over time. That’s the way to an avalanche of debt.
Another way is to prioritize paying smaller balances first to enjoy quick wins, improve motivation and build momentum. That’s the debt snowball method — the most beneficial method for people who need tangible progress to stay consistent and committed to their debt-paying journey — and here’s how to do it.
What is the Debt Snowball Method?
As popularized by financier Dave Ramsey, the debt snowball method involves paying off one credit card or loan balance at a time, starting with the smallest balance until you are debt free.
This debt snowball strategy is perfect for people who are motivated by quick wins. However, there is a downside: You may end up paying more interest in the long run.
Most people don’t agree with the idea of paying extra interest to get quick cash. Why would you pay small balances and let the interest earners stay?
Because you’re not a robot — you’re human. It’s important to choose a debt management strategy that works for you and keeps you engaged.
Whether you want to eliminate high-interest credit card debt or your monthly mortgage payment, using the debt snowball method can help you achieve financial freedom.
The debt snowball method helps you take that first difficult step toward paying off debt — and then the next step, and the one after that.
How Snowball Debt Works
It’s a simple process. Here’s everything you need to know.
1. List all your debts from smallest to largest
Start by writing down all your outstanding debts. Ignore interest rates.
Then, sort them from smallest to largest balance. This can be done on paper, a spreadsheet or a budgeting app like Rocket Money or Monarch.
Credit accounts we recommend include:
- Credit card debt
- Student loans
- Personal loans
- Car loans
- Unpaid medical bills
- Mortgage-related debt
- Any other things debt collectors keep calling you
2. Budget to Pay Less on Every Debt
To start a debt snowball program, you will first need to ensure that you pay the minimum balance on all of your debts, so find the appropriate minimum for each debt. If you’re struggling to get out of debt, look at your budget and consider ways to reduce your spending. Look for ways to earn extra money on the side as well.
Look for ways every month to reduce your spending and increase your income. You will need that extra money for the next step.
3. Put Every Extra Money Towards Your Lowest Debt
Once you’ve arranged your minimum loan payments, put any extra money into the first mortgage on the list – the one with the lowest balance.
That means you will be paying the minimum and maximum amount designated on that loan. Let’s say $50 and an additional $150 for a total payment of $200.
4. Once Paid, Add That Amount to the Next Smallest Debt
By starting with your smallest debt, you’ll pay off the balance faster than you would any other.
But don’t stress if it seems like even the smallest debt is taking forever to pay off – there’s a learning curve to the snowball path, and most people start slow. Once you’ve paid off the smallest debt, take all the money you put toward that debt and put it toward your next monthly debt payment.
That means you’ll be paying the minimum payment for the first loan ($50), the minimum payment for the second loan ($100, for example) and your additional monthly dollar amount ($150) all toward the second loan. Now, you make a monthly payment of $300 instead of $100.
Keep paying that amount until the second loan is paid off. Depending on the size and interest rate of your second smallest loan, you may find that the balance dries up much faster than the first.
5. Repeat
Once your second debt is paid off, use the debt snowball strategy for all your other debts.
For a third credit account, pay the sum of the first loan’s minimum payment ($50), the second loan’s minimum payment ($100), the third loan’s minimum payment ($125, for example) and the additional monthly fixed amount ($150). That’s how you play in putting $425 toward that debt every month.
It’s a simple concept but it requires patience and consistency.
If you’re hesitant about paying a little extra interest but know you need a quick win, try a debt snowball. Once this debt management strategy works, you’ll see how insignificant that extra interest can be.
Benefits of Using the Credit Snowball Method
The real magic behind the debt snowball method is its psychological effect. When you’re faced with a mountain of debt that seems impossible to overcome, breaking it down into smaller pieces helps us feel more manageable. As you celebrate each new win and milestone, your commitment grows.
Along the way, practice better budgeting and improve your financial skills to avoid racking up more debt in the future. It’s an empowering process that can change the way you think about money.
The Debt Snowball Method vs. The Avalanche approach to debt
Another method closely related to the debt snowball method is the debt avalanche method. While the debt snowball ignores interest rates, the debt avalanche method has you list your debt balances from highest to lowest interest rate.
Because these processes take time, you will continue to collect more interest while paying off the loan. If you choose the avalanche method, you may have to wait longer for your first big win, but you will end up with interest in the long run.
Both are effective ways to tackle your debt management plan; just choose which one suits you best.
Tips for Successfully Using the Debt Snowball Method
If your chosen path turns that debt into a snowball you can throw off the cliff, here are some important strategies to consider to keep you on the road to success.
- Set realistic goals for yourself. You may not be able to put an extra $100 into debt, even if you really want to. That’s why you should check your budget to find out what makes sense for your finances. Even an extra $25 or $50 is better than continuing to struggle with debt. Your snowball strategy will still grow, just at a slower rate.
- Be patient. The beginning will be the slowest part of the whole process. It may feel like you’re going nowhere for months, but stay consistent and trust that you’re headed in the right direction.
- Track your progress. Those small wins are great fun to celebrate, but you can celebrate your progress along the way, too. Using a snowball credit calculator or a simple spreadsheet, check your progress regularly. Watch the snow grow and get excited about the future.
Common Challenges and How to Overcome Them
Managing debt isn’t easy, and it won’t always be fun. It requires patience, consistency and careful money management. Even with a debt snowball-like process, there is plenty of room for challenges and slippage. Don’t let them sideline you from your goals.
- High-interest loans can add up quickly. If you’re under six of the highest interest rates, it can feel like it’s pulling you away from your goal. Stick to the snowball method for longer if you’re committed, or switch to the avalanche method if the high-interest loan is too fast.
- Stopping immediately. Sticking to the snowball method for a few months may not get you to your first win. Commit to spending at least a year working consistently to pay off debt in this way before moving on to another.
- Accumulating too much credit card debt. It will be difficult to pay off credit card debt if you are still using it. Dave Ramsey and others suggest having a savings account cushion (even if it’s just a few hundred dollars to start) to avoid reaching for the credit card when unexpected expenses come up.
There is a reason this method has been successful for so many people. It works. For the most part, it’s a simple process that you can handle without the help of a financial advisor or debt management company. It’s worth a little extra preparation and effort to find your financial freedom at the end of the road.
