Debt Repayment with the Snowball Method
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The Debt Snowball
The “Debt Snowball” is a strategy for debtors to tackle their debt in a way that takes advantage of human psychology. Essentially, one’s debts are listed out from smallest down to largest and all efforts above and beyond paying minimum payments are focused on paying off those on the top of the list. The smallest debts are paid off first. The largest debts paid off last.
Here is a quick example of what the debt snowball would like in action:
Unsorted Debt List | Debt |
Car Debt #1 | $12,400 |
Mortgage | $152,000 |
Credit Card # 1 | $6,000 |
Credit Card # 2 | $2,000 |
Loan from Grandma | $600 |
Debt Snowball | Debt |
Loan from Grandma | $600 |
Credit Card # 2 | $2,000 |
Credit Card # 1 | $6,000 |
Car Debt #1 | $12,400 |
Mortgage | $152,000 |
Note that this method is interest rate agnostic. It doesn’t matter if the debt you are repaying has a higher or lower interest rate when compared with each other. There is a method that takes interest rate into account, and it is called the Debt Avalanche Method.
Keep in mind that the Snowball Method will not mathematically get you out of debt the quickest. Rather, it is constructed to have a higher likelihood of overall success given that it focuses on psychological principles.
As each debt is paid off the monthly amount used towards that debt is rolled over to the next debt down the list. As the payment used to target the top of the list gets larger and larger with each paid off debt it resembles a snowball. As the snowball goes downhill it gets bigger with each roll imparting more destructive force. The debt snowball seeks to eliminate your debt with increasing effectiveness over time.
Racking up the Wins
The Debt Snowball characteristic that makes it more powerful than many other debt repayment strategies is that it will result in the debtor ‘winning,’ early and often. Hopefully, by feeling successful at the beginning of the process, the debtor will remain motivated to continue getting out of debt even as the debt amounts get larger.
When looking at the previous example one can see that it would be easier to pay off grandma and 2 credit cards with a subtotal of $8,600 than it would be to pay off the car which has a singular total of $12,400. By paying off 3 debts quickly, a person might feel a sense of accomplishment. The snowball that one could then throw at the car debt would be much more significant as it would be at least as large as the minimum payments for both the credit cards and whatever monthly premium granny was charging.
In all practicality, the average person or family looking to get out of debt probably has many more line items. In fact, the average American, according to the 2019 Experian Consumer Credit Review (as reported by CNBC here) has 4 credit cards.
Thus, a married couple likely has around 8 credit cards, 2 or 3 cars, student loan debt, a mortgage, personal loans, HELOCs, 2nd mortgages, you name it. Being able to knock off several of those debts quickly can be a very powerful feeling. This is the true advantage of the Snowball Method for Debt Repayment.
How did the Debt Snowball Become So Popular?
After researching this topic for quite some time I have concluded that the real genesis of the Debt Snowball Method is unknown or at least not well documented. However, Dave Ramsey, the Personal Finance guru is undoubtedly the one who made it mainstream. Incorporating this type of debt repayment in his, ‘baby steps,’ he has made it a staple amongst is millions of followers.
As mentioned before, this method is not necessarily the quickest way to get out of debt based on mathematics. Thus, the star power of someone as famous in the field as Dave Ramsey was probably needed to sell the psychological and behavioral benefits of the snowball method.
With only a handful of strategies out there to tackle debt, focusing on something other than math seems a bit strange, however, if done with some common sense it can be very powerful and rewarding. Accepting that we must tackle not only our debts, but our own nature as human beings is something easier said then done. The Snowball Method tackles both at once by tricking the latter.
Splitting Hairs May be Worth It
We already know that the Snowball Method requires us to list out our debts smallest to largest to determine the priority of paying them off. But what if we throw in a wrinkle: we consider to some degree the interest rate that we pay to give us a little more insight? Let’s modify the above example to highlight where interest rates may make a difference.
Debt Snowball | Debt | Interest Rate |
Loan from Grandma | $600 | 0% |
Credit Card # 2 | $2,000 | 8% |
Credit Card # 1 | $6,000 | 19% |
Car Debt #1 | $12,400 | 4.5% |
Mortgage | $152,000 | 3.5% |
Debt Snowball with Interest Rate Considered | Debt | Interest Rate |
Loan from Grandma | $600 | 0% |
Credit Card # 1 | $6,000 | 19% |
Credit Card # 2 | $2,000 | 8% |
Car Debt #1 | $12,400 | 4.5% |
Mortgage | $152,000 | 3.5% |
As you can see above, I highlighted the debts for Credit Cards #1 and #2. The difference between the interest rates being charged is substantial: 11%. Over the course of the year, the difference would be a bit more than $600 for Credit Card #2 which is just as much as we owe Grandma.
If we switch the order for these two debt payments, we will no longer be using the Snowball method strictly, but we can get to our goal a bit quicker without leaving behind most of the ‘quick wins.’ Shuffling around debts that are the same order of magnitude in principal but ordered by highest interest rate is a great way to try to modify the Snowball Method to get things paid off a little bit quicker.
Whether you choose to go the vanilla Debt Snowball route or add a twist just remember that just choosing one and sticking with it is the most important part. If you become uninterested or unable to continue along the path, then tweak it. Focus on putting one foot forward each and month or paycheck.
Hopefully, most months you can make progress towards your goals, but eventually disaster will strike. Emergencies happen. Capital growth and debt reduction don’t occur linearly. Take the challenges that come your way, address them head on, and move on.
Does the Debt Snowball Method Work?
Yes! It absolutely works. I can say this from personal experience. After graduating college and racking up an incredible amount of credit card debt, car loan debt while earning next to nothing being in the military, I was able to get things under control by using the Snowball Method. The mental attitude shift enabled by the Debt Snowball, I believe, is what led to my ultimate success.
By using the Debt Snowball, I felt invigorated about paying off my loans because it always seemed like I was crossing something off my list. My budget each month got easier and less tedious. The number of websites I had to log on to and pieces of mail I had to send out to square my payments away each month dropped significantly.
Ultimately, despite a massive debt load, I was able to use the Debt Snowball to get out of debt and it is for this reason I know it can work for just about anyone. When I first started working after school, the minimum payments on my debt were over 70% of my take home pay. There was no reason for optimism. I was over $100,000 in debt and I essentially had no assets to show for it.
But, paycheck by paycheck and month after month I whittled away the number of loans, the balances of the smallest first went to 0… then, so did all the anxiety. The journey wasn’t quick, but it was satisfying. After a few years I was able to say I was debt free outside of a mortgage and was able to get back to building wealth.
Debt Snowball Calculators and Tools
Below are a few tools to get you started on your snowball journey. I have included spreadsheets (even the one I originally used) and online calculators. Once you get serious you will want to go with something that you can save and refer to. As your budget changes month to month your progress will also change.
Keeping a record of your successes and failures is a good way to learn how to do better. If you choose to use the spreadsheets, then store a monthly revision in a folder on your desktop or Dropbox. If you decide to use a web app to do the calculation, then print out a dated PDF with the results so you can refer back to what you did from time to time.
- Debt Snowball Calculator from Vertex42 – This is the original excel spreadsheet I used from over a decade ago. It is still one of the most popular tools to calculate your debt snowball.
- Debt Snowball Spreadsheet with Tutorial – This spreadsheet comes with a tutorial. The tool was created by the author of the ‘Life and Finances,’ Blog.
- Online Debt Snowball Calculator – This web app is pretty good from Nerd Wallet. Nothing to install… you can use it directly in your web browser. Just keep in mind that once you do your calculation there isn’t a good way to save the results for future analyses outside of printing PDF.
- Undebt.it Debt Snowball Calculator – Excellent online calculator to figure out how to prioritize your snowball. The main advantage of this one is that it easy to quickly input all of the data.
Debt Snowball Informational Resources
Below are a few additional resources. Books and blogs are a great way to keep you motivated and intellectually engaged when it comes to reducing debt. You may find that when trying to actively reduce your debt that you may be spending more time at work or at home instead of paying for activities to entertain you. Fill that time with some reading… people from all walks of life have had to tackle serious debt challenges. You will probably find that some of the success stories echo your own situation… learn from their mistakes and victories for a much less in time and money!
Debt Snowball Books
- Dave Ramsey’s ‘The Total Money Makeover.’ Love him or hate him, this book is essential reading if you are looking to implement the debt snowball.
- ‘Clear That Debt: Debt Snowball Planner, Debt Tracker & Expense Planner,’ the title says it all. If you prefer pen and paper to digital methods of tracking your debt snowball, then this workbook is for you.
Debt Snowball Blogs
- Life and My Finances – This is an interesting blog that revolves almost exclusively around getting out of debt. This blog is also an author of one of the calculators above.
- Our Debt Free Family – This blogger paid down over $120,000 in debt so she provides some advice born of lived experience. Reading about personal stories of success can be exceptionally motivating.
- Believe in a Budget – Launched in 2015, Kristin also has a personal touch to her approach to debt and budgeting. She also shares how she was able to write about her debt journey in a way that resulted in a full time blogging gig.
- Easy Budget Blog – Written by a married couple, this blog talks about how the authors paid off $71,000 in debt with 2 kids and a single income. They figured it out in 2 years and 8 months which is certainly a big achievement!
Conclusion and Warning
The Debt Snowball Method for getting out of debt is an incredibly powerful tool that can help aid just about anyone master their own psychology to break their financial chains. There are other methods out there, such as the Avalanche Method, that can get folks clear of debt quicker, however the Snowball Method has a strong ability to aid with motivation along the way. With the tweak I mentioned above on making a few adjustments on repayment order based on interest rates it may be possible to get the best of both worlds.
All this said, I hope you enjoyed this article. It is solely my opinion and should not be considered specific financial advice. Everyone is on a different financial journey, and because of this you should consider speaking and with a Financial Advisor that you pay and that has your best interest in mind.
