How to Use the Debt Snowball Method to Pay Off Debt

If you’re struggling with debt, you’re not alone. According to a report by The Pew Charitable Trusts, 80% of Americans have some form of debt, whether it’s credit card debt, student loans, or a mortgage. However, just because debt is common doesn’t mean it’s inevitable. One effective strategy for paying off debt is the debt snowball method.

What is the Debt Snowball Method?

The debt snowball method is a debt repayment strategy that involves paying off your debts from smallest to largest, regardless of interest rates. The idea behind this method is that by focusing on paying off your smallest debts first, you’ll gain momentum and motivation as you see those debts disappear.

Here’s how it works:

  1. Make a list of all your debts, from smallest to largest.
  2. Make the minimum payment on all your debts except the smallest one.
  3. Put as much money as possible towards paying off the smallest debt until it’s paid in full.
  4. Once the smallest debt is paid off, take the money you were putting towards that debt and apply it to the next smallest debt on your list.
  5. Repeat this process until all your debts are paid off.

Why the Debt Snowball Method Works

The debt snowball method is effective for several reasons. First, it provides a sense of accomplishment and motivation as you see your debts disappear one by one. This can be especially important if you have a lot of debt and feel overwhelmed by the idea of paying it all off.

Second, the debt snowball method can help you build momentum. As you pay off each debt, you’ll have more money available to put towards the next debt on your list. This can create a snowball effect, where your debt repayment efforts gain speed and power over time.

Finally, the debt snowball method can help you stay focused and disciplined. By concentrating on paying off one debt at a time, you’ll be less likely to get sidetracked or discouraged.

An Example of the Debt Snowball Method in Action

Let’s say you have the following debts:

  • $500 credit card debt with a 20% interest rate
  • $1,000 personal loan with a 10% interest rate
  • $5,000 car loan with a 5% interest rate
  • $20,000 student loan with a 4% interest rate

Using the debt snowball method, you would start by paying off the $500 credit card debt first. Let’s say you can afford to put an extra $100 per month towards your debt repayment efforts. Here’s how it would work:

  • Month 1: Pay $100 extra towards the credit card debt, bringing the balance down to $400.
  • Month 2: Pay $100 extra towards the credit card debt, bringing the balance down to $300.
  • Month 3: Pay $100 extra towards the credit card debt, bringing the balance down to $200.
  • Month 4: Pay $100 extra towards the credit card debt, bringing the balance down to $100.
  • Month 5: Pay off the remaining $100 on the credit card debt.

Once the credit card debt is paid off, you would take the $100 you were putting towards that debt and apply it to the next smallest debt on your list, which is the $1,000 personal loan. Here’s how it would work:

  • Month 6: Pay $100 extra towards the personal loan, bringing the balance down to $900.
  • Month 7: Pay $100 extra towards the personal loan, bringing the balance down to $800.
  • Month 8: Pay $100 extra towards the personal loan, bringing the balance down to $700.
  • Month 9: Pay $100 extra towards the personal loan, bringing the balance down to $600.
  • Month 10: Pay $100 extra towards the personal loan, bringing the balance down to $500.
  • Month 11: Pay $100 extra towards the personal loan, bringing the balance down to $400.
  • Month 12: Pay $100 extra towards the personal loan, bringing the balance down to $300.
  • Month 13: Pay $100 extra towards the personal loan, bringing the balance down to $200.
  • Month 14: Pay $100 extra towards the personal loan, bringing the balance down to $100.
  • Month 15: Pay off the remaining $100 on the personal loan.

You would then repeat this process with the car loan and student loan until all your debts are paid off.

Tips for Making the Debt Snowball Method Work for You

If you’re interested in using the debt snowball method to pay off your debts, here are a few tips to keep in mind:

  1. Be realistic about how much extra money you can put towards your debt repayment efforts each month. It’s important to create a budget and stick to it so you don’t end up overspending in other areas.
  2. Consider ways to increase your income or reduce your expenses, so you have more money available to put towards your debts. This could involve getting a side job, selling unused items, or cutting back on discretionary spending.
  3. Stay motivated by celebrating your progress along the way. Each time you pay off a debt, take a moment to acknowledge your accomplishment and give yourself a pat on the back.
  4. Don’t be discouraged if you have setbacks along the way. If an unexpected expense comes up or you have a month where you can’t put as much money towards your debts as you’d like, don’t beat yourself up. Just get back on track as soon as possible and keep moving forward.