When I first started to tackle the mountain of debt that I had amassed, I did what I considered the practical thing to do.
I prioritized the different debts by their interest rate. By paying off the high-interest debt first, I was going to avoid hundreds of dollars in interest over time.
Makes sense right?
Well, it does make sense and it would be the right course of action if it weren’t for our human nature.
Here’s how the rest of the story played out for me:
After a few months of contributing all my extra income to my highest interest rate debt, which also happened to be my largest debt, I became discouraged with the lack of progress I was making.
On paper, I was making progress towards becoming debt-free but I still felt anxious and burdened by all my other debt.
I gave in and actually increased my debt for a little while until I found a better solution.
This is where Dave Ramsey came to the rescue with his Debt Snowball Method.
What is the Debt Snowball Method?
The debt snowball definition: a debt pay off strategy where you prioritize paying off the smallest debt first working your way to the largest debt in order to gain momentum and keep motivation.
It’s really a pretty simple concept that can be boiled down to a few steps:
- Sort your debts from smallest to largest
- Pay the minimum monthly payments on all your debts
- Put ANY extra money towards your smallest debt.
- Once your smallest debt is paid off, move to the next smallest debt.
- Continue until you’re debt-free!
This debt reduction strategy works because it rewards our hardwired desire for quick wins and tricks our brains into staying motivated.
We also tend to feel less anxious when we have a lower number of debts, even if the amount we owe is exactly the same.
For example, we would feel more anxious if we had three different credit card debts of $2,000 for a total of $6,000 than if we had one credit card debt of $6,000.
By focusing on the smallest debt first, the debt snowball method quickly reduces the total number of debts we owe therefore increasing our motivation and keeping our spirits high.
A Debt Snowball Method Example in Action:
How does the debt snowball method work in real life?
I’m going to run through an example of how to apply the debt snowball method to become debt-free. For simplicity’s sake, I’m not going to add in the accruing monthly interest on the debt.
Steve has the following debts, listed in order from smallest to largest:
Debt Snowball Month#1:
In this example, Steve has 5 different debts and has $1200 a month to pay them off.
Once he pays the minimum monthly payment on each debt, he has $290 leftover to apply to the smallest loan amount – his medical bill.
Debt Snowball Month#2:
When you pour your surplus money into the smallest debt, it disappears quickly. Steve’s medical bill will be gone by month 3.
Debt Snowball Month#6:
By month 6 of Steve’s debt snowball, his medical bill and credit card A is fully paid off leaving him with only 3 total debts left.
This is where the snowball really comes into effect. You can see that Steve is now putting $475 towards his smallest debt.
Debt Snowball Months#12+
By month 12, Steve’s other credit card debt will be paid off. Now he can focus all his efforts on his car and student loan – putting a grand total of $700 towards his car loan.
At this point, all of Steve’s high-interest debt is paid off and if he wanted to, he could allocate some of his surpluses to saving for retirement.
4 Tips for Using the Debt Snowball Method:
Staying disciplined when paying off debt is hard. Here are four different things to remember when you’re deep into the debt snowball method.
1. Don’t Get Into any More Debt:
This is an obvious one, but you’d be surprised by the number of people who open new lines of credit while they’re up to their eyes in debt.
Dave and I completely agree, that when you’re in debt, you should focus on clawing your way out rather than sticking to the same bad money habits that got you into debt in the first place.
2. Automate Everything you can:
First, you should set up automatic bill payment for all your utility bills and monthly subscription so you can focus on your debt payments.
I also have a bad tendency to forget to pay bills. After a few late fees, I finally learned my lesson and set up automatic bill payment which has probably saved me a few hundred dollars in late fees.
3. Keep Track on a Spreadsheet:
Things that are measured, get managed. It may be uncomfortable to write down all your debts and look at them every few days, but it’s necessary.
It’s too easy and convenient to convince yourself that “everything is okay” if you don’t have a clear idea where you’re at.
Dave Ramsey created a free debt snowball form which you can use to keep track of your snowball progress.
4. Don’t be Tempted:
Somewhere around the time, you have half your debts paid off you’ll be tempted to use the extra money to increase your monthly budget. It happens to everyone. Don’t be tempted.
The huge benefit of using the debt snowball method is that you slowly build your “snowball” payment – making it grow every time you fully pay off a debt.
Make sure you capitalize on that benefit and put every penny you can towards becoming debt-free.
Why Does the Debt Snowball Method Work?
The debt snowball method is a note about maths but behavior modification. That is why it works.
The student loan is the largest debt and if you start paying on it then you won’t be able to get rid of it for a long time.
You will notice that the numbers are going down on the balance and you will stop paying extra very soon.
The reason behind this is that you have to wait for a long time to get a win but on the other side, you still have the small and annoying debt that hangs around yourself.
It’s a fact that whenever you do something with consistency and with the determination to complete it then you will always come up with the positive results.
But if you ditch the first of your dept then you will notice quick progress. Very soon you will be following the second dept and then the next.
You will feel that you can stick to this plan because it will be working and what time will come that you will succeed and making yourself completely free.
Paying from these earlier and smaller debts you will have a depth snowball with which you can easily get rid of the bigger depts.
Dave Ramsey has said that the problem with your money is the person who is dealing with that money and not the math and that’s completely right.
If the person gets to change his habits only then he can deal with the problem of money.
What Should I Include In My Debt Snowball?
If you have this question in your mind, then you are thinking like a money Pro. All the non-mortgage debt should be included in your debt snowball.
Its examples are:
- Student loans
- Credit card balances
- Medical bills
- Payday loans
- Personal loans
- Car notes
- Home equity loans
One thing that I must make a layer that dept is never good. For an instance, if you take these student loans and you think that it is worthwhile a death then you are wrong.
The truth is that this will damage your finances for a very long time. According to an analysis the outstanding student loan debt has reached an amount of almost $1.41 trillion.
When am I ready to start the debt snowball?
If you have saved $1000 for your emergency fund, then it is the time you are ready to start your debts snowball.
It means that if you are done with the baby step 1, you can easily start the debt snowball. It is because this emergency fund will protect you from taking further depts.
How do I start my debt snowball?
It is very simple to organize your debt snowball. All you have to do is to list your non-mortgage dept in ascending order.
Then you should get rid of the smallest debt first. And then move to the next one until you are completely debt-free. And then the time to make the wealth for the future comes.
Free Printable Debt Snowball Form!
Dave Ramsey has created a free debt snowball form which you can download and print. It’s straightforward and easy to use. Download the form.
Liked this post? Check out Dave Ramsey’s 7 Baby Steps Explained & Summarized
Have you tried the debt snowball method? What was your experience like?
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