There are two common and popular ways to pay off debts — The “Snowball Method” and the “Avalanche Method“. This article is going to focus on how you can pay off Debt with the snowball method!
How it works & why
Think about the ways you make a large snowball (if you’re from a hot location, don’t worry… I’ll share how it’s done). You take a small amount of snow in your hands, pack it together and have a small snowball. Then you take that small, packed ball, put it in the snow, and roll it around. Every time you roll it over a fresh new section of snow on the ground, it picks up more and more onto your ball. The more you roll, the more snow sticks to your ball, and the larger it gets.
Continue doing this for an hour and you have a large snowball that you’ll eventually need more people to help you move the snowball around because of its weight. The point here is not to teach you how to make snowballs if you’ve never made one before. The point here is to realize that it takes a small amount of snow, which is continually rolled around, in order to make a large ball.
In a similar way, while you may be looking at a significant amount of accumulated debt, don’t lose hope! By starting small (literally) and being consistent, you can pay off a significant amount of debt off very quickly. Here’s how to do it:
- List out all of your debts and loans, including their balances
- Sort the list from smallest balance at the top of the list to biggest balance at the bottom of the list
- Take the top most (smallest balance) debt and focus on that debt first! This is your small, starting snowball.
- Pay as much as you realistically can to get rid of the smallest debt first (lets call this amount X), and only make minimum payments on all your other debts (amount Y).
- Once the smallest balance is gone, take the money that you would have been paying towards your smallest debt (amount X), combine it with your minimum payment for debt #2 on the list (second smallest balance). This means you will be paying a total of X + Y towards your second largest debt. This is your snowball rolling and getting bigger.
- Keep repeating steps 2-5 until you are making giant snowball payments against your largest debts and everything is paid off.
- Congratulate yourself for paying off all your debt! You’re done! Try to make sure you never take on unreasonable debt again and keep finances under control.
An example scenario
Lets say that you have four debts as shown below:
|Credit card debt||$3,400||$50|
Note that these debts are already listed in order of increasing balance (step 2 above)
Next, you determine that you can pay $400 towards your debt every month without feeling like you’re burdening yourself or stretching yourself too thin.
This means that you can pay $265 towards your first debt (the smallest balance) and the remaining $40 + $45 + $50 = $135 towards your minimum payments for all the other debts every month.
By the end of month 2, your first debt (the personal loan) should be completely paid off. Phew! That’s one less loan to think about!
Next, you will do all the same steps to pay down your second largest debt in the list — the student loan! An example pay off schedule for this made-up scenario can be seen below in a table!
An example payoff schedule
|Total paid||Amt toward min payments||Amt toward smallest debt||Personal Loan balance||Student Loan balance||Auto Loan balance||Credit card debt balance|
|Month 2||400||165||235||paid off!||1390||2210||3300|
|Month 3||400||95||305||paid off!||1085||2165||3250|
|Month 4||400||95||305||paid off!||780||2120||3200|
|Month 5||400||95||305||paid off!||475||2075||3150|
|Month 6||400||95||305||paid off!||170||2030||3100|
|Month 7||400||230||170||paid off!||paid off!||1850||3050|
|Month 8||400||50||350||paid off!||paid off!||1500||3000|
|Month 9||400||50||350||paid off!||paid off!||1150||2950|
|Month 10||400||50||350||paid off!||paid off!||800||2900|
|Month 11||400||50||350||paid off!||paid off!||450||2850|
|Month 12||400||50||350||paid off!||paid off!||100||2800|
|Month 13||400||50||350||paid off!||paid off!||paid off!||2750|
|Month 14||400||0||400||paid off!||paid off!||paid off!||2700|
There are some noticebale things in the above payoff schedule:
- Note: The table above does not include all the interest you will be accruing on balances moving month to month to simplify this example.
- By month 2, you would have completely paid off the personal loan debt
- By month 7, the student loan debt disappears as well
- By the end of the year, you will have paid off 3 out of your 4 debts and only need to focus on the 1 remaining debt for the next year
- Every time you pay off a debt, the amount you put towards your smallest debt becomes larger and larger. This is the snowball effect.
- In a little over a year and a half, you will have paid off ALL of your debts. This is nearly $8000 worth of debt that disappears over 1.5 years, with just making payments of $400 across all your debt accounts.
- Consider a side hustle to bring that time frame in. If the amount you could make towards your debts was larger than $400 a month, the timeframe could be drastically reduced. If you could afford $800 per month towards paying off debts, you would be done paying off all your debt in under a year!
Is the snowball method right for me?
Are you the type of person who likes to see incremental improvements and celebrate small wins? If you can pay off your smallest debt quickly, instead of trying to tackle them all at once, you can build the motivation you need to quickly pay off all the rest of your debts as well. If this sounds like you, then the snowball method is definitely the way to go!
If you’d like a calculator to help you figure out how quickly you could become debt free, see the Snowball method calculator available here.
Let us know in the comments below: Have you used the snowball method to pay down debts? How did it go? Did you achieve your goals?