Paying off debt can feel overwhelming. Especially if you’re not sure where to start. That’s where a debt management plan like the debt snowball method can help.
Below, we’ll cover an overview of the debt snowball method, how it works, how it’s beneficial, and an alternative.
What is the Debt Snowball Method?
Did you ever make a snowman when you were a kid?
The easiest way to do it is by forming a small snowball and then rolling it around in the snow until it grows large enough to be the base of your snowman. As you roll it around, it gains momentum and speed, making it easier to grow.
You can apply the same principles to repaying debt too. You pay off the smallest debt first to gain momentum so that paying off your biggest loans is easier.
How Does the Debt Snowball Method Work?
Financial advisor Dave Ramsey popularized the debt snowball method and includes it as baby step 2 of his 7 baby step money management plan.
Using the debt snowball method looks like this:
- Create a list of all of your non-mortgage debts from smallest to largest
- Make minimum payments on all of the debt
- Put as much extra money as you can on the smallest debt until it’s paid in full
- Move onto the next smallest debt until all of your debt is paid in full
List non-mortgage debts from smallest to largest
Debts you should put on the list include medical debt, credit card debt, individual student loans, personal loans, car loans, and other non-mortgage loans. List them from smallest to largest balance—don’t worry about interest rates. The smallest debt is the one you’re paying off first.
Don’t bundle your student loans together on your list. Unless you’ve consolidated your federal student loans or refinanced your private student loans, you probably have multiple individual student loans from each year of college. Each one has its own loan balance, so it should be placed on its own line.
If you aren’t sure how much you owe or who you owe it to, request a free credit report from AnnualCreditReport.com. Your credit report will list your credit score and credit history, including your debt. Normally, it’s only free to receive a copy of your credit report once per year, but now, you can request it once per week for free through April 2021.
While it’s handy, check your credit report for errors too. Errors on your credit report can significantly affect your credit score.
Make minimum payments on all of the debt
Remember to continue making minimum payments on all of your debt. If you miss a payment, the debt could enter default, or you could owe a late payment fee. Either way, it’s a costly mistake.
If possible, set up autopay to prevent accidentally missing a payment. For many private student loans, enrolling in autopay can knock 0.25% off of the interest rate.
Put extra money on the smallest debt until it’s paid in full
After making the minimum payments, put any extra money you have on the smallest debt. How much extra depends on your financial situation. To get a good idea of how much money you can afford to pay on your debt each month, make a budget, or use a personal finance app like Mint.
Note, Dave Ramsey suggests that before making any extra payments, you should first:
- Be current on your utility bills
- Save a $1,000 starter emergency fund
Move onto the next smallest debt until all of your debt is paid in full
After you pay off your smallest debt, move onto the next smallest debt. When that one’s paid off, move onto the next one. And so on and so on until you’re debt-free!
Does the Debt Snowball Method Work?
The debt snowball method does work. It helps people take control of their personal finances and get out of debt. However, it’s not the “cheapest” way to pay off your debt.
In his book, Total Money Makeover: A Proven Plan for Financial Fitness, Dave Ramsey acknowledges that if you run the numbers, it’s cheaper to pay off your highest interest rate debt first. (This is called the “avalanche method”)
However, Ramsey is still quick to defend the debt snowball method because, to him, personal finance is “20 percent head knowledge and 80 percent behavior.” And, just because a debt payoff method is cheaper doesn’t mean it’s as effective at getting results.
With the debt snowball method, you get quick wins. You pay off the smallest debt in a relatively short amount of time, so you feel more motivated to keep knocking down your debt. That’s why Ramsey encourages others to use the debt snowball method and has made it a core part of his Financial Peace University.
Debt Avalanche vs. Debt Snowball Method
The debt snowball method is praised by many, but it’s not your only option. You can also go with the debt avalanche method. The debt avalanche method involves paying off your debt in order of the highest interest rate to the smallest interest rate.
Sometimes, comparing both methods yields the same result. This happens in cases where your smallest loan balances are also the loans with the highest interest rates.
More often than not, however, the debt avalanche method saves you more money than the debt snowball method. Why? Your high-interest rate debt (regardless of the loan balance) is actually your most expensive debt because it grows at the fastest rate.
Using a website like unbury.me makes it easy to compare both methods using the debt list you created. Just input your loans and debt, the balances, the interest rate, and the minimum payment amount.
To show you how the two methods compare, we put the following loans into unbury.me:
| Type | Debt Amount | Interest Rate |
| Credit Card 1 | $1,500 | 16.70% |
| Credit Card 2 | $3,000 | 19.01% |
| Fed Student Loan 1 | $2,500 | 4.00% |
| Fed Student Loan 2 | $3,500 | 4.00% |
| Fed Student Loan 3 | $950.00 | 3.50% |
| Private Student Loan 1 | $10,000 | 7.99% |
| Private Student Loan 2 | $12,000 | 6.50% |
Debt Avalanche Results
With the debt avalanche method, you pay off Credit Card 2 with the 19.01% interest rate first and Federal Student Loan 3 with the 3.5% interest rate last. If your monthly payment is $473 total, but you pay an extra $100 each month, you will pay off all of the debt in 5 years and 11 months. The total interest paid would be $7,177.00.
Debt Snowball Results
With the debt snowball method, you pay off Federal Student Loan 3 with a loan balance of $950.00 first and Private Student Loan 2 with a loan balance of $12,000 last. Making that same extra $100 monthly payment each month, you will pay off all of the debt in 6 years and 1 month. The total interest paid would be $8,212.94.
In this scenario, going with the debt snowball method costs an extra $1,035.94 and takes an additional month.
So, Is Debt Snowball Right for Me?
There isn’t a universal debt management method that’s best for everyone.
If you’re already motivated to pay off your debt, then the debt avalanche method will likely save you the most money.
If you’re not the best with staying motivated, the debt snowball method might work best for you because you’ll actually pay off your debt.
Just know that choosing how to pay off debt is an individual decision, and it doesn’t have to be set in stone either. If you start out with one method and don’t like it, you can easily switch to the other to save money or to feel more motivated.
Learn more about debt management with these articles:
Unbury Me: How a Debt Calculator Can Help You Get Out of Debt
16 Tips & Tricks on How to Budget Your Money The Right Way
Tips on Paying Student Loans During Coronavirus for All Borrowers
6 Simple Ways to Lower Your Credit Card Debt
