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How to Use the Snowball Method to Pay Off Debt

A young couple struggling with debt reviews research on how to use the snowball method to reduce it.

Paying off debt can sometimes seem like an impossible task. When you’re making monthly payments and still have months or years to go, it’s easy to get discouraged.

There is a debt repayment strategy known as the snowball method that you may be able to use to quickly eliminate one or more of your debts. It’s easy to implement and it can help you stay motivated to achieve your goals.

How Does the Snowball Method Work?

With the snowball method, you focus on paying off your smallest debt first and then work your way up until all of your debts are paid. It's like starting with a small snowball that you roll down a hill. The more the snowball rolls, the more snow it collects and the bigger it gets.

The snowball method is simple and easy to understand. You make the minimum monthly payments on all of your debts. You then concentrate on paying extra on your smallest debt to pay it off as soon as possible.

After you have paid off your smallest debt, you take the extra money you were using and apply it to your next smallest debt. You then continue the process until all of your debts are paid.

It’s important to keep in mind that the snowball method typically does not apply to mortgages. It’s best suited for smaller debts like credit cards, personal loans, or car loan payments, for example.

How Do You Get Started With the Snowball Method?

The snowball method is very easy to implement. The following steps outline the process.

Step 1: Make a list of all of your debts and organize them from the smallest to the largest.

Step 2: Make the minimum monthly payments on all of your debts.

Step 3: On your smallest debt, pay as much as you can on top of the regular payment each month.

Step 4: After you have eliminated your smallest debt, take the extra money that you were applying towards that debt and apply it towards paying off your next smallest debt.

Step 5: Continue the process until all of your debts have been eliminated.

A Practical Example

A good way to understand how the snowball method works is with a practical example. Let's say you have the following four debts that you’re making payments on each month:

1. $2,000 personal loan - $85 payment

2. $8,000 student loan - $225 payment

3. $1,000 credit card debt - $50 payment

4. $20,000 car loan - $375 payment

To use the snowball method, you would make the minimum payments each month on all of your debts except the smallest—the $1,000 credit card debt. For this debt, you would pay as much as you could each month. For example, let's say you can pay an extra $250 per month toward it—this means you can eliminate that debt in just four months.

Next, you would apply $250 per month plus the $50 minimum payment on your credit card debt ($250 + $50 = $300) towards the $2,000 personal loan. You would continue to make the minimum monthly payments on your other debts. This would allow you to eliminate the personal loan debt in seven months.

After paying off the personal loan, you would then repeat the process to eliminate the other two debts. Each time you paid off a debt, you would add the amounts of the minimum monthly payments you were making to the $250 and apply it towards the next smallest debt.

What Are the Pros and Cons of the Snowball Method?

Although the snowball method is a great way to eliminate debt, it may not be a good strategy for everyone. It’s important to consider the pros and cons to make sure it makes sense for your financial situation.

Pro: It Gives You a Confidence Boost

Many people struggle with motivation when trying to pay off their debts. It may take months or years to pay off a debt if you make your regular monthly payments, which may cause you to get discouraged.

The snowball method, however, helps you stay motivated. The quick wins you get with this strategy can boost your confidence and help you stay focused.

Pro: It Gives You a System to Follow

Taking an unfocused approach to paying off debt may cause you to take longer than necessary to achieve your goal. Having a system to follow can help you stay focused. Using the snowball method, you’ll know which debts to concentrate on to pay them off quickly.

Con: You May Not Have Extra Money

The snowball method may be difficult to implement if your budget is tight and you don’t have any extra money to put toward your debts each month. It may still be possible though by working more hours, taking on a second job, or going through your monthly budget to eliminate expenses.

Con: You May Spend More in Interest

The snowball method requires you to make the minimum monthly payments on your debts while focusing on completely paying off your smallest debt and then working your way through the rest.

This may result in paying more in interest than if you had made higher payments on all of your debts each month. Paying more in interest may be worth it, however, to have a simple system to follow.

A Debt Payoff Alternative to Consider

If you would like to consider your alternatives before deciding on the snowball method, debt consolidation is another strategy you may be able to use. With debt consolidation, you take out a personal loan to pay off your debts. You then repay the loan with one monthly payment that’s easy to keep up with.

An important advantage of this strategy to consider is that the interest rate on the personal loan or possibly a home equity loan may be lower than some of your current debts, which could help you save money in the end. If money is tight, you may also be able to lower your monthly payments by extending the loan term.

Click on the following link to learn more about using a personal loan to consolidate debt.


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