Having lived my whole life in the Midwest, I spent most of my childhood snow days working to make that perfect snowman. Not too wet but not too powdery, the perfect snow was imperative. Starting that first snowball was always a little difficult – once we got the snow to stay together in a small ball, we’d roll it around the yard trying to get more snow to stick to it. Once it reached a certain size, it became easier and easier, and got larger and larger, until it was a respectable “snowman bottom.”
The “debt snowball” method of knocking out debt is similar to the construction of an actual snowball – start small and give it a little extra effort, and pretty soon you will have a sizable snowball of money in order to attack the debt. Financial guru Dave Ramsey has made the debt snowball famous, as it’s an essential part of his “getting out of debt” plan. For those who are unfamiliar with how to do a debt snowball, the basic concept is to list your debts smallest to largest and attack the smallest debt with a vengeance. Once you’ve paid off your smallest debt, use the money you would have spent towards your minimum payment on that debt to pay on the next smallest debt, and so on. Your momentum will grow and grow, and by the end you will be throwing huge piles of cash on the last debt to knock it out QUICKLY! Here is an example of what a debt snowball might look like, in nice, round numbers.
Debts Smallest to Largest: (use the BALANCE of the debt to rank these, not the monthly payment)
Home Depot Credit Card – $25/mo, $500 balance (20% interest)
Target Credit Card – $25/mo, $1,000 balance (20% interest)
Hospital Bill – $150/mo, $1000 balance (0% interest)
Furniture Store Loan – $200/mo, $2,500 balance (0% interest)
401k Loan – $100/mo, $3,000 balance (5% interest)
Chase Credit Card – $65/mo, $6,000 balance (15% interest)
Discover Credit Card – $150/mo, $7,000 balance (10% interest)
Car Payment – $300/mo, $10,000 balance (5% interest)
ALL debts go in the debt snowball, with the exception of a mortgage. Some people prefer to pay off all consumer debt first, and save all student loans till the end since they have a longer payment period and can be deferred in a hardship situation. Some people will list a second mortgage last, even if the balance is less than another debt. You should do what works for YOU; however, follow the basic principle of “lowest balance first” to make some headway!
There is a temptation to list the debts in order of highest interest to lowest interest. By paying off the highest interest loans first, you are lowering the amount of your monthly payments going straight into the bank’s pocket. Mathematically, this makes sense. Dave does NOT recommend this. In his words, “if math was working for you, you wouldn’t be in debt in the first place!” Personal finance is, as he says, 20% head knowledge and 80% behavior. Unless you are an extremely self-disciplined person in the area of money (meaning, you probably don’t have debt in the first place, or if you do, it isn’t a “debt regret” – and I think most of us regret the majority of our debt!), don’t do it in order of interest. You need the behavioral “carrot on a stick” to continue clawing your way out of debt, and the promise of quick returns is that carrot. After trying it both ways, I definitely agree with Dave on this one. There is nothing like a few quick wins in the debt payoff department to give you motivation and momentum.
(The exception to this would be if you have a payday loan or a title loan – get those dudes out of your life IMMEDIATELY. The interest ends up being something like 1000%(?) in the end, and you are chained to these people. Cut them loose. Work a second job to get rid of them ASAP, sell something on Craigslist – they need to be gone.)
Plug your debts and balances into a calculator. My absolute favorite, FREE calculator is on What’s the Cost?. It allows you to tweak how much you are putting each month towards debt, automatically makes a debt snowball for you, and creates a monthly amortization table for you. It will fire you up when you see how much you’ll be throwing at debt once you get to the end of the plan! (NB: Even though it shows a £ rather than a $ symbol, because the site owner is from the UK, the math still works exactly the same. Just pretend it’s a dollar sign in your head.) 😉
Decide how much you can pay on your debts each month. Obviously you need to be able to afford at least the minimum payments, but being able to throw even a tiny bit extra at debt really adds up in the long run.
Scenario 1: The “only minimum payments” snowball.
Minimum payments on these debts: $1015/month.
“It will take you 35 months to pay off these debts if you snowball correctly. During that time, you’ll pay $4,144 in interest.”
Scenario 2: “Minimum payments + $100/mo” snowball.
If you are able to just come up with $100 extra a month to throw at debt, in addition to your minimum payments of $1015, for a total of $1115/month:
“It will take you 31 months to pay off these debts if you snowball correctly. During that time, you’ll pay $3,532 in interest.”
4 months faster and $600 less interest is pretty good for just $100/mo! What about if you could come up with $250/mo extra to pay on your debt?
Scenario 3: “Minimum payments + 250/mo” snowball: $1265/month:
“It will take you 27 months to pay off these debts if you snowball correctly. During that time, you’ll pay $2,923 in interest.”
That is TEN months quicker and over $1,200 in interest saved! And a year from today, you’ll have already paid off 5 of the 8 debts – what a huge relief that can be realized QUICKLY! You can be free of $31,000 in debt in just over 2 years. What will you do with an extra $1265 a month!? If you’re not sure that getting out of debt as quickly as possible is worth it, spend a little time dreaming about what that extra monthly cash would mean to your family.
That’s all well and good if you are able to make your minimum payments AND come up with a chunk of extra to throw at your smallest debt. But what if you are living paycheck to paycheck, your grocery budget is already bare bones, you don’t have cable, and you don’t even think you can squeeze $20 out of your tight budget to add to your debt snowball? What if you could, but aren’t really willing to give up the $80/mo you spend on your kids’ music lessons, which is their only extracurricular activity?
That’s where the “debt snowflakes” come in. By using the snowflake method, you can find/earn a respectable amount of money each month to make a sizable dent in your load of debt. It’s relatively easy and painless, doesn’t steal from other budget categories, and is actually fun to track and watch grow!