Using the Debt Snowball Plan to Pay Off Debt

The shame and anxiety caused by debt will take a physical and emotional toll on your health. Ridding yourself of it is a step towards freeing yourself from that stress and a step towards financial independence. Yes, it may be daunting at first. But it can be done.

We recommend using the debt snowball method, a debt reduction and management strategy evangelized by personal finance guru Dave Ramsey. It’s a strategy that has been designed to create noticeable results early on and works especially well if you:

  • are having trouble motivating yourself to pay off your bills
  • need something easy to follow

This method isn't for you (yet) if you can't make the minimum payments on your bills.

How the Debt Snowball works

Picture a snowball rolling down a hill. It starts out tiny but becomes a massive boulder as it gains traction. Now imagine your debt payments as the snowball. You pay off each loan in order from least to greatest, ‘rolling’ over the amount paid from one to the next as each is done, gaining momentum and staying motivated over time.

Here’s the full plan:

  1. List out your debts in order from smallest to greatest and note their minimum payments. Add everything that you don’t pay off in full each month - i.e., don’t include your mortgage or rent. But do include credit card bills, auto loans, student debt, and medical bills.

It should look something like this:

Debt Balance Minimum Payment
Credit Card $1000 $50
Car loan $5000 $100
Student loan $6000 $200
  1. Make the minimum payment on each of them You don’t want to get charged any fees.

  2. Put as much money as you can towards the smallest debt on the list Throw every spare penny at it - every little bit counts. Try to cut out any unnecessary spending. Ask for more hours at work if possible.

  3. Once that debt been repaid, snowball those payments onto to tackle the next item on the list Combine what you were paying towards your previous debts (minimum payments + extra money) with the minimum payment amount of the next debt. Use that fund to tackle the next item on the list.

  4. Repeat until you owe nothing

Still confused? Check out the example below.

This strategy has worked for thousands and thousands of people because it's not about math, it's about psychology. Paying off the smaller debts give you quick wins, and most of us need the emotional satisfaction to stay motivated.

Yes, you might pay less interest overall if you focus on paying off that $20k student loan debt. But you'll probably give up quicker, and are more likely to go on a buying binge which will set you even further behind. However, if you're a highly motivated individual who can stay the course, the debt avalanche method may be the best strategy for you.

Pros

  • Simple to follow - no complicated math required
  • Can ease stress by allowing you to focus on just one bill at a time
  • Psychological victories from seeing small debts disappear faster - makes it easier to stay motivated

Cons

  • You may end up paying more in interest to your creditors as opposed to using the debt avalanche/debt stacking strategy.

The Debt Snowball in Action - An Example

Here's an example. Let's say you have 3 debts, totaling $5,000, and you have $500/month to put towards them.

Month 1

Debt Balance Minimum Payment You Pay
Credit Card $1000 $50 $300
Car loan $2000 $100 $100
Medical bill $3000 $200 $200

For the first few months, you'll pay the minimum for the car and student loans, as they are the largest. You'll put your remaining money towards the credit card. For simplicity, we’ll ignore interest.

Month 4

Debt Balance Minimum Payment You Pay
Credit Card $0 $0 $0
Car loan $1600 $100 $400
Medical bill $2200 $200 $200

Boom! One down. Take the $300 you were putting towards your credit card and add it to the amount you’re putting towards the car loan.

Month 8

Debt Balance Minimum Payment You Pay
Credit Card $0 $0 $0
Car loan $0 $0 $0
Medical bill $1400 $200 $600

Another debt bites the dust. Hopefully you know the drill by now - throw all you have left against that medical bill.

Month 11

Debt Balance Minimum Payment You Pay
Credit Card $0 $0 $0
Car loan $0 $0 $0
Medical bill $0 $0 $0

Success! Everything has been paid off. Your creditors will stop hounding you. Pat yourself on the back, and prepare to take the next step towards freedom - saving and investing your money. :)

Conclusion

The debt snowball method is a great way to motivate yourself to pay off your debts. It's a simple and straightforward debt repayment strategy. The psychological feelings of victory as you cross each debt off the list can be intoxicating. So this is the method we think is effective for most people - as they say, the best diet is the one you stick to. Good luck!