The Debt Snowball Method: How It Works And How To Use It (2024)

Just as your debt can snowball into larger and larger amounts, it also can be reduced by adopting the debt snowball method of repayment.

The debt snowball method is among the strategies you can employ to decrease and ultimately eliminate your debt. It works by concentrating on paying off the smallest amount of debt first, then paying off the next highest amount and so on before gradually reaching the peak amount of debt. This method, popularized by personal finance personality Dave Ramsey, is about building momentum. The hope is that you repeatedly gain a sense of achievement by wiping out one debt after another.

How Does the Debt Snowball Method Work?

When you embrace the debt snowball method, you initially focus on paying off the smallest amount of debt in a short amount of time while still making payments on other debts. Once the smallest debt vanishes, you earmark the money you were allocating for that debt toward the debt with the next small dollar amount. In theory, you stick with this method until all of your debts are erased.

This method creates a snowball effect, meaning that the step-by-step debt payoffs build on each other and accelerate. This is similar to when a snowball rolls downhill, gathering speed and accumulating more and more snow. Whether it’s snow or debt reduction, this effect delivers momentum. And, when it comes to your debts, the hope is that this momentum will increasingly boost your motivation by supplying a series of small victories.

How to Get Your Debt Snowball Rolling

Once you’re ready to commit to the debt snowball method, start with these four steps:

1. List all of your outstanding loan and credit card debts.
2. Arrange the list from the smallest outstanding balance to the largest outstanding balance.
3. Tackle the smallest debt first, regardless of how much the interest rate is. When you do this, be sure to make at least the minimum monthly payments on all your debts. You should then put any extra money you come up with for debt repayment toward the smallest debt. So, if the smallest debt comes with a minimum monthly payment of $75 but you’ve found a surplus of $75 in your budget for debt reduction, then you’d couple the two dollar amounts to make a $150 monthly payment on the smallest debt.
4. Keep the snowball rolling. Continue making a higher-than-minimum monthly payment on the smallest debt until it’s zero. Then, move to the next smallest debt. Again, keep making minimum payments on your other debts. But now, assign the $150 you were paying on the first debt to the next highest debt, layering that amount on top of the minimum monthly payment.

Debt Snowball Example

How does the debt snowball method look when you put it into practice? Here’s an example. Let’s say you have the following debts, with the following associated annual percentage rates (APRs):

In this example, you’d tackle the $900 medical bill first, since it’s the smallest dollar amount. You’d make the minimum monthly payment of $50, plus any extra money you can allocate for repaying this debt. Let’s say the additional amount available is $100. Therefore, you’d pay a total of $150 each month for the medical bill—while paying the minimums due on the other three accounts. If you keep up these monthly payments, you will wipe out the medical debt in six months.

After the medical bill is paid off, you’d move to the credit card debt, the student loan debt and, finally, the auto loan debt. When you switch to concentrating on the credit card debt, for instance, you’d make the minimum monthly payment of $150 and tack on the $150 you had been paying toward the medical debt. Money set aside for paying previous debts continually rolls over to the remaining debts, resulting in more and more money that you can allocate for the debts that carry increasingly higher amounts.

With the snowball method, the minimum monthly payments and the interest rates don’t play a part in choosing which debt to initially zero in on.

What Debts to Include in Your Debt Snowball

It’s fine to take on medical, credit card, payday loan, personal loan, home equity loan, auto loan and student loan debt in your debt snowball strategy.

However, it’s not recommended that you include your primary mortgage. Why? There are two key reasons: Mortgage payments and amounts tend to be large and interest rates on mortgages tend to be low.

How the Debt Snowball Method Costs Money

While the debt snowball method offers a number of advantages, it does come with one big drawback. Because the method focuses on the largest debts rather than the highest-interest debts, you could wind up paying more in interest charges over time. In other words, in exchange for the momentum you gain, you could be paying even more money to borrow money.

For instance, a 2.99% interest rate may be attached to the smallest debt and a 17.99% interest rate to the largest debt. However, the snowball method emphasizes eliminating the smallest debt first (2.99%), meaning you may accumulate more and more interest on the largest debt (17.99%) because you’re making only the minimum monthly payment on it.

How to Speed Up Your Debt Snowball

Yes, the debt snowball method rewards you for continually slicing your debts. But what if you want to fast-track the method? Here are five tips:

• Create a budget. Setting up a budget gives you a better sense of where you stand financially. When you put together a budget, you may be able to unearth savings that you can apply to your debt snowball strategy. For the best shot at succeeding with the debt snowball method, consider developing a budget first.
• Establish an emergency fund. Before you embark on a debt snowball journey, it may be wise to build an emergency fund. This can give you a financial cushion in case of surprise expenses, such as major car repairs or a hospital stay.
• Be smart with extra money. Did you score a bonus at work? Did you receive a hefty tax refund? Consider applying that extra money toward your debt. Any surplus cash you come across can help you pay off your debt faster.
• Sell some stuff. If you’re got a perfectly good TV sitting in the attic or a closet full of unworn clothes that are in good shape, consider selling them to raise more money for your debt snowball strategy.
• Start a side hustle. From Uber driver to dog walker to music teacher, income from a part-time gig can supplement your debt snowball strategy.

Is the Debt Snowball Right for You?

If you think small victories will provide you with the motivation you need to pay off your debt, the debt snowball method could be just the ticket for eliminating your debt. But if you don’t need instant gratification and you’re irked by the notion of forking over hundreds or even thousands of dollars in interest charges over time, then the debt snowball method may not be your best path toward debt reduction.

Debt Snowball Alternatives

If the debt snowball method isn’t a great fit for you, other debt reduction strategies are out there:

• Debt avalanche method. The debt avalanche takes the opposite approach from the debt snowball: Instead of concentrating on the lowest debt amount first, the debt avalanche focuses first on the highest-interest debt. Revisiting our four-account debt snowball example above, the $7,500 in credit card debt with the 17.99% APR would take priority over the three other debts. Using the debt avalanche, the next debt to pay off would be the 5.25% APR student loan—until, presumably, you pay off all of your debts. There are pluses and minuses to both the debt avalanche and the debt snowball.
• Debt snowflaking. Debt snowflaking involves earmarking tiny amounts of money for debt reduction. For instance, maybe you picked up a $1 bill in the parking lot at the grocery store or you received a $5 rebate for the purchase of some product. This “found” money can go toward decreasing your debt.
• Debt consolidation. You may be able to take out a loan to consolidate most or all of your debts into a single monthly payment. This not only could make it easier to pay off your debts, but also may result in an overall lower interest rate.
• Debt management. Debt management plans, the best of which are generally offered by nonprofit consumer credit counseling agencies, allow you to make a single monthly payment that covers all of your unsecured debts. It may simplify the payment process and speed up the amount of time it takes you to get out of debt.
• Debt settlement. Debt settlement generally involves paying off your debt in one lump sum at a lower amount than what you owe. You can try to settle the debt on your own or rely on a third-party debt settlement company. While this option may sound attractive, it comes with significant risks. Make sure you learn the ins and outs of debt settlement before you take this path.

Bottom Line

The best debt reduction method for you is the one you’ll stick with until you’ve gotten your debts under control. Because it provides early and visible progress—thus reinforcing your overall belief that eliminating your debt is possible—the debt snowball method works well for many people. However, if you have significant amounts of debt that carry a higher APR, you may want to compare the debt snowball to the debt avalanche, or to other debt relief methods, before you proceed.