With the debt snowball method, you will follow these steps:
- Make the minimum payment for all five debts.
- Put extra money on Debt A.
- Pay off Debt A. Put all the money you used for Debt A into Debt B.
- Pay off Debt B. Put all the money you used for Debt B to Debt C.
- Pay off debt C. Put all the money you used on debt C to debt D.
- Pay off debt D. Put all the money you used for debt D into debt E.
- Pay Off Debt E. You No Longer Debt!
In this scenario, you are putting $ 510 per month for the minimum monthly payments. Let’s say you have enough money to make all your minimums, plus an extra $ 50 per month.
During the first two months, you would pay a total of $ 75 for Debt A. (The minimum payment of $ 25, plus the additional $ 50.) After just two months, you have fully paid off Debt A.
Then you put the $ 75 you paid for Debt A to Debt B. Your total monthly payment for Debt B becomes: $ 35 + $ 75 = $ 110. (The minimum payment for Debt B, plus the money you put in for Debt A.)
When you pay off debt B, you will carry that $ 110 over to debt C. Paying off debt C allows you to put $ 310 on debt D. By the time you hit debt E, you can make monthly payments of $ 560. (That’s the money from all minimum payments, plus the extra $ 50.)
Why the debt snowball method works
The Snowball Method is a debt repayment plan that relies on the power of motivation. By focusing on your smallest debt first, you can pay it off quickly. Instead of spending years slowly progressing on a large debt, you get a quick win.
These advancements will give you a sense of accomplishment, which can motivate you to keep going.
As you pay off each debt, you renew the payments in the next. So even if the balances go up, so do the payments. It helps you keep pace; you will always see progress being made. When you reach your greatest debt, now is your alone debt. This can make it a lot less intimidating.
The problem with the debt snowball
While the debt snowball method can be great for some people, it has one major downside – it’s expensive. This is because it basically ignores your interest rates.
The more debt you have, the more interest you will pay. High interest debt, like credit card debt, can incur many charges over time. If your biggest debt is also your highest interest rate debt, you could end up paying thousands in interest charges by the time you’re out of debt.
This extra interest also means that it will take you longer to pay off all of your debts. Each minimum payment will be used to pay the interest charges first. It is only after the interest costs are covered that the rest goes to your principal balance.
One way to limit this problem is to lower the interest rate on your credit card. The best way to do this is to use a balance transfer credit card. This allows you to transfer a credit card balance to a card with a lower APR, reducing your interest charges. (Check out the Balance Transfer Calculator to see how it works.)
The Debt Snowball Method vs The Debt Avalanche Method
If you want to pay off your debt as quickly as possible, the debt snowball method may not be for you. Instead, you may prefer the debt avalanche method.
The Debt Avalanche method allows you to prioritize your debts by interest rate. Instead of focusing on the smallest debt first, you focus on the one with the highest interest rate. When you pay off that debt, you go to debt with the second highest rate – and so on.
Since you pay off your most expensive loans first, you will pay less interest overall. You’ll also get rid of your debt faster if you don’t have to pay additional interest charges. (You can use a credit card interest calculator to get a feel for the impact of interest rates on debt repayment.)
These two methods have their own advantages and disadvantages. If you are someone who needs a win to stay motivated, the snowball method may work the best. However, if motivation is not an issue, the avalanche method can save you money.