The snowball method works because it lets you score your first win quickly: paying off your smallest debt in full. This will motivate you to keep paying off your other debts and help you avoid debt fatigue.
Let’s take a look at a real-life example that will illustrate how the method works.
An Example Of the Snowball Method in Action
To understand the method better, let’s look at a list of debts that would be familiar to many indebted consumers:
|Type of Debt||Balance Owing||Minimum Monthly Payment|
As you can see, we’ve sorted the debts from smallest to largest. Following the snowball method, we’ll want to pay down the medical debt first and make sure we make our minimum monthly payments on all the other debts too.
In this case, the total minimum monthly payments come to $370.
Let’s set a monthly debt-reduction budget of $800 and bring down the medical debt by an extra $430 a month over and above the monthly payments. Every time we pay off a debt, we’ll roll its monthly payments into the payment on the next-biggest debt.
Here’s the repayment timeline for this scenario.
- The medical debt will be repaid in full after just 2 months - next up is the credit card
- The credit card will be repaid by month 6 - now for the auto loan
- By month 20, the auto loan will be fully repaid and we can now throw all our resources at the student loan
- 37 months after we started (that’s just three years and a month) all our debts are theoretically cleared, giving us an extra $800 per month in our budget that can be used for savings and investments
This example used a manageable repayment amount of $800, but you can adjust your monthly repayment budget according to your income.
The more you pay above your minimum payment, the quicker you’ll repay your debt - and the more you’ll save on interest-rate charges.
Is It Good For You?
It provides an easy and manageable way to reduce your debt in small chunks over time. You’ll get a lot of satisfaction using this method because you’ll see your debts cleared and eliminated for good one by one.
If you’ve had trouble repaying your debt in the past because you just didn’t see any progress with your repayment method, the snowball approach may be the ideal way to motivate yourself to repay your debt.
On the other hand, if you have one big outstanding debt like a credit card with a large balance or a student loan, the debt snowball approach may not be ideal.
The debt snowball is a great approach to debt reduction through small, manageable steps. It provides a great sense of achievement because it allows you to defeat your debt through a series of small wins.
If you have multiple smaller debts that you need to pay off, this approach represents an excellent option.