Did you catch our previous blog where I broke down 5 of the best debt payoff methods and then gave my input as to which one is best? If not, you can check it out here.
Since this subject is so important for financial wellness, we have decided to do a deeper dive into each of the 5 strategies. Our hope is that these deep dives will leave you with as much information as possible so you can make the most educated decision on the debt payoff method that is right for you.
Let’s get started! Today, we’ll be discussing one of the most popular and well-known strategies, the Debt Snowball Method.
The Debt Snowball was made popular by radio show host and author, Dave Ramsey. Ramsey touts this method as being the quickest way to pay off debt and, according to a study done by the Harvard Business Review, this might be the case much of the time.
Here’s how it works. I like to imagine the construction of a snowman. Every snowman starts off as a little clump of snow that you then roll around until a little snowball forms. As you continue rolling this snowball in the snow, it builds upon itself and grows larger and larger until it’s big enough to go towards creating your masterpiece – your snowman.
Now, imagine that the growing snowball is money you put towards paying off your debts and the snowman is your ultimate debt free masterpiece.
What you’re doing in this situation is tackling that smallest non-mortgage debt balance (or, snowflake?) by paying it off as quickly as you can while still making minimum payments on all other debts.
Once you get that smallest debt paid off, you can carry the payment you were putting towards that first debt and then proceed to add it on top of the minimum payment of your next smallest debt, thus building your snowball and momentum.
As an example, below is a step-by-step scenario in which the Debt Snowball is played out by an imaginary person. We’ll call her Sally.
Step 1: List your non-mortgage debts from smallest to largest balance
Here’s how Sally’s list would look:
- Friend Loan: $300, flexible payments
- Credit Card: $1,000, $20 minimum payment
- Car Loan: $7,000, $350 minimum payment
- Student Loan: $12,000, $200 minimum payment
Step 2: Pay off the lowest balance
Sally will now make efforts to pay off her Friend Loan as it has the smallest balance. Since payments for this loan are flexible, Sally determines that she can spare an extra $150 per month and decides to throw that towards paying her friend back. With this set up, she will be able to kiss that debt goodbye in 2 short months.
Step 3: Move on to the next smallest balance
Next, Sally will begin paying off her next smallest balance, the credit card. In order to do that, Sally is going to stack the $150 she directed each month at her friend’s loan and will add it to the $20 minimum credit card payment, giving her $170 to direct towards paying off her credit card.
Let’s pretend that this credit card has a 20% interest rate, Sally would have this thing behind her in 6 months. However, if she just made the minimum payments, it would take a little over 2.5 years to pay it off with $1,170 gone to interest payments.
Beautifully done, Sally.
Step 4: Repeat
Now that Sally has paid off two debts she’s going to continue building that momentum (ehem, snowball) and crush the next debt on her list – her car loan. She will continue this pattern until each of her debtors are paid and, viola, she is suddenly flushed with cash because her money is no longer tied up to her payments.
Why it Works
The reason why The Snowball Method works is because, in many cases, you’ll experience quick wins as you pay off that smallest debt in a minimal amount of time. People like to win.
Winning is fun, addicting, and most importantly winning builds confidence. Sometimes, that’s all a person needs to maintain motivation and stick it out to the end.
If you’re a fan of quick wins and want to experience some achievements early on, then the Snowball Method might be the perfect fit for your debt elimination voyage.
Stay tuned over the coming weeks as we’ll be releasing more blogs breaking down 4 other debt elimination methods that you might also want to consider. These methods include the Avalanche Method, the Highest to Lowest Payment Method, the Emotional Heaviness Method, and what I like to call The Score Method.
Of course, if you’d like to meet with someone one-on-one to discuss the pros and cons of each strategy and to help guide you in the strategy that would be best for you, then schedule a complimentary call with one of our coaches today! We’ll help create a plan personalized to you and you’ll be sure to see results faster than you thought possible.
