Debt Snowball: Best Debt Payoff Method?
If you have a mountain of debt or even just a little bit of debt, and debt payoff is your goal, then you are in the right place! Firstly, we are going to learn what the debt snowball is! Secondly, we are going to learn what the debt avalanche is. Third, we are going to compare the debt snowball to the debt avalanche to determine which one is better.
It is easy to feel overwhelmed with debt and even more so when you are trying to get rid of it for good. I know I frequently feel overwhelmed! Like me, maybe you woke up one day and finally realized that you needed to fix your finances! You swiped your credit cards for years like it was your money! Moreover, you were paying minimum payments on those credit cards for all these years!
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As a result, we have some debt we need to pay off. However, to be clear, it is going to take some time to do this. There isn’t any instant gratification! Further, becoming financially free requires lots of hard work and dedication! Paying off all of our debt involves discipline!
What is the Debt Snowball?
Most importantly, this debt pay off method is super simple!
The debt snowball means you pay off your smallest debt first and then roll that payment money into the next smallest debt. You keep rolling over this money into each debt until it is all gone! This method is all about paying off the smallest debt! Interest rates are not being accounted for!
However, this is where your discipline comes in. If you start spending that extra money instead of rolling into your payments, then you will likely never be debt free!
To clarify, you have to pay extra money to your smallest debt! Paying minimum payments on all of your debts is not a debt snowball!
Basic Steps of the Debt Snowball
Firstly, make a list of all of your debts. The order needs to be the smallest balance owed to the largest. Ensure the minimum payments of each debt is listed as well!
Secondly, start a budget! You need to know how much extra money you can use towards debt repayment! You can start with these articles to get you going.
Third, put all your extra money towards your debt with the smallest balance owed, again, regardless of interest rates!
Above all, do not worry about interest rates or your home mortgage if you choose to use this method to pay off your debt! We will worry about our home mortgage when all the terrible consumer debt is paid off!
Moreover, while you are paying all extra money towards your smallest debt, do NOT forget to make minimum payments on all other debt you have! You still have to make payments on everything!
Certainly, if you find that you don’t have any extra money to pay towards your debt with your income, then I suggest you find some side income opportunities. For example, I routinely earn over 100 dollars per month with this side hustle!
I also save, on average, 30 dollars per month using this financial tool! I am on track to save over 360 dollars total for the year on my internet and cell phone bills!
Further, do NOT forget about Ibotta! You and I earn cash back for everyday purchases! Ibotta has paid out over 500 million dollars for buying the things we already buy!
Debt Snowball Example
Let’s walk through a typical example of the debt snowball. Our imaginary friend, John W, has some debt to pay off. Here is a list of his debt, smallest to biggest:
- Credit Card #1 – $2,500, $100 minimum payment, 16% interest rate.
- Auto Loan – $3,800, $150 minimum payment, 5% interest rate.
- Student Loan – $5,000, $100 minimum payment, 10% interest rate.
- Credit Card #2 – $14,000, $300 minimum payment, 16% interest rate.
Indeed, we can say for sure that John should not have been using those credit cards as extra income!
Now, what John is going to do is pay minimum payments each month to the auto loan, student loan, and credit card #2. Meanwhile, all of the extra money that he was able to free up by implementing an effective budget will go towards credit card #1.
With everything, John can afford to pay 800 dollars per month towards credit card #1, which is an initial snowball of 700 dollars! Therefore, in three months, he will owe only 100 dollars to that credit card.
After that, in month 4, John will pay that remaining 100 dollars to credit card #1, and pay his minimum payment plus 700 dollars to the auto loan! Therefore, starting in month five he will pay the minimum amount plus all 800 extra dollars that he freed up by paying off the credit card to the auto loan.
Further, when the auto loan is paid off, he will pay the auto loan minimum payment, the student loan minimum payment, plus the extra 800 dollars he freed up with his budget.
That is a debt snowball. As a result of paying off one debt, you take ALL of the money you were paying monthly to that debt and pay it plus the minimum payment on the next debt.
To clarify, I did not do all the proper math and include the interest rates in the examples above.
What is a Debt Avalanche?
The debt avalanche is EXACTLY like the debt snowball with just one difference. In the debt snowball method, you pay the smallest debt to largest debt.
However, in the debt avalanche method, you pay the largest interest rate debt off first and continue to the next largest interest rate.
Is Debt Snowball or the Avalanche Better?
Some would argue that the avalanche method is better because you save more money on interest. However, your highest interest debt can often be your largest balance. You will work hard, be disciplined with your spending, but not see any results for a long time.
If you are successful with the debt avalanche, it is better because it saves more money. On the other hand, if you fail, it will likely cost you more.
On the other hand, the debt snowball method gives more frequent wins in most cases. Paying off smaller debts for those quick wins can keep you motivated to keep going! These behavioral changes can be of utmost importance over what makes more sense mathematically.
You may even make more changes to pay off debt even faster once you get that first win! Further, once those first couple debts are paid off, you will have more cash flow when something changes or an emergency happens!
Debt Snowball Vs. Debt Avalanche for Debt Payoff
Let’s work John’s numbers for both methods.
If John utilizes the debt snowball method, he will pay 3,494 dollars in total interest on his debt, and be debt free in November 2019. Without the debt snowball, he will pay 10,300 dollars interest and be debt free in March 2024!
However, if John uses the debt avalanche method, he will pay a total of 2,950 dollars in interest and be debt free in October 2019! Not much of a difference between the two is there?
Above all, remember each situation is different, and the results will differ as well! When I performed the calculations for this comparison, I just made up the interest rates and the minimum payments amounts for John’s imaginary debt.
If you want to compare your personal debt between the debt snowball and debt avalanche you can download the excel spreadsheet I used from right HERE. It is an excellent spreadsheet to have and utilize for this journey.
To sum up…
I am using the debt snowball method. I need those quick wins to keep myself motivated and disciplined. Further, the fewer bills you have the easier it is to keep track!
Most importantly, know yourself and what you need to be successful. Just remember, a plan you abandon is a failure! Achieving subgoals can help you stick to your plan and not fail! If paying more money to interest (I know, it sounds silly) keeps you motivated to continue then I say so be it and let’s get it done!
Further, do NOT forget that the more money you make, the more you can throw at your debt! Likewise, the more you trim out of your budget, the more you can throw at your debt! Therefore, the debt will be paid off faster!
Click here to download your free debt snowball template.
YOUR TURN – What do you think of these two methods? Are you currently using either of them? Let us know in the comments!