Debt Repayment Method

Debt can be tough to avoid, which is why many people face it. People are especially bogged down with debts or financial obligations like medical expenses, household costs, or student loans. Even though debt is common, knowing how to handle it responsibly is key to staying financially secure.

A debt repayment strategy that’s become popular over the years for its simplicity and success is the debt snowball method. Keep reading to learn what the debt snowball method is and how it works, along with some pros and cons to help you decide if it’s the right approach for you.

What is the debt snowball method?

The debt snowball method is a way to reduce debt that focuses on paying off your debts in order of the smallest to the largest, no matter how much the interest rates are. Created by personal finance expert Dave Ramsey, this method focuses on the psychological benefit of experiencing quick victories by getting rid of smaller debts first, giving you the momentum to tackle your larger debts.¹

Step by step: How to use the debt snowball method

1) Calculate your debts and list them from smallest to largest

Begin by making a detailed list of all your debts, including credit card balances, loans and any other outstanding obligations.

After you’ve created your list, write down the amount owed for each debt and add it all up to get an idea of how much debt you have in total. Once you have a clear understanding of your total debt, write down the minimum monthly payment amount for each debt on the list.

Seeing the total amount of debt you owe may be a bit intimidating, but it will help give insight into your financial situation, so you’re better equipped to tackle it head on.

2) Use extra funds to pay off your smallest debt

After allocating money for each of the minimum due payments, you can put any leftover funds toward paying off the smallest debt on your list. To speed up your debt payoff journey, try reducing non-essential spending like monthly subscriptions or dining out. You can also find ways to increase your income by selling items you don’t need or taking on a side gig.

3) Start paying off your next smallest debt

Once the smallest debt is paid off, take the money you were using to pay off that debt and apply it to the next smallest debt on your list, along with the minimum payment. This creates a "snowball" effect, where the amount you can put toward debt repayment increases over time.

4) Repeat

Continue paying off your remaining debts from smallest to largest until you are debt-free, but continue making all minimum payments for all other debts. As each debt is eliminated, you'll have more money available to take on the next one, speeding up your progress toward financial freedom.

Pros and cons of the debt snowball repayment method

Pros

Psychological Motivation:

The debt snowball method may give you a mental boost as you pay off smaller debts. It encourages quick wins which can help motivate you even more throughout your debt repayment journey.

Simplicity:

This particular debt repayment method is easy to understand and follow, even if you don’t have much experience with managing your finances.

Tangible Progress:

Since you’re focusing on one debt at a time, financial freedom may feel easier to reach as you pay off each debt, providing you with a sense of accomplishment.

Cons

May Pay More in Interest:

Since the debt snowball method does not prioritize debts based on interest rates, you may end up paying more in interest compared to other debt reduction strategies, like the debt avalanche method that focuses on paying off the debts with the highest interest rates first.

Not Always the Most Cost-Effective:

While the debt snowball method may work for some, it may not always be the most cost-effective strategy for paying off debt, especially for those with high-interest debts.

Deciding whether the debt snowball method is for you

Before committing to the debt snowball method, it’s essential to consider your unique financial situation and goals. Start by asking yourself:

• Would an immediate sense of accomplishment help you stay motivated in your debt repayment journey?
• Are you willing to potentially pay more in interest in exchange for quick wins and simplicity?

Your answers can help you determine whether the debt snowball method is the right choice for your financial situation. The success of the debt snowball method ultimately depends on your circumstances, including the amount of debt owed, interest rates and personal financial habits.

If you’re struggling with motivation or prefer an easy and structured approach to debt repayment, the debt snowball method may help you achieve your financial goals.

Keep in mind that it may not be the best strategy if you are focused on minimizing interest payments or have the wiggle room in your budget to tackle debts strategically based on interest rates, which may save you more money in the end.

Choose the method that fits your financial goals

The debt snowball method offers a straightforward approach to debt reduction for many, but in the end, it’s up to you to decide what makes the most sense for your finances. Focusing on small victories and creating momentum may help give you the motivation you need to pay off even the largest debts and start down the path to a brighter financial future.

Source:

1 https://www.ramseysolutions.com/debt/how-the-debt-snowball-method-works