What is the Debt Snowball Method?


When you’re drowning in a pool of mounting debt, figuring out how to get out isn’t always easy. But numerous strategies can help you stay on track to cash out your bankroll.

When you’re drowning in a pool of mounting debt, figuring out how to get out isn’t always easy. With different interest rates and payment terms, some people lose faith that they can become one debt free. But numerous strategies can help you stay on track to cash out your bankroll. Depending on your personality, feeling “quick wins” from the debt snowball method can give you the nudge you need to keep making your payments, according to Tanya Taylor, a New York City-based certified public accountant and financial coach with decades of experience in the finance industry banking and insurance industry.

What is the Debt Snowball Method?

The debt snowball method is one of several debt-payment strategies you could try if you have a lot of debt with accruing interest. Essentially, you prioritize paying off your loans with the lowest outstanding balances first and slowly build up your metaphorical “snowball” of debt paid off.

[Read: 10 Easy Ways to Pay Off Debt.]

How does the debt snowball method work?

First, make a list of all debts – from student loans to car notes too credit card balance – which you still have to pay back. Note the respective remaining balance and interest rates. Next, rank your remaining debt in order from lowest to highest.

From there, you continue to pay the minimum amount on all of your remaining debt each time a payment is due. But with the debt snowball method, any additional payments you can afford to expedite your overall debt payoff should be directed toward the debt with the lowest outstanding balance. Once the smallest debt is paid off, take all the money you spent on the monthly bill and apply it to the second smallest debt on your list. Continue this pattern of paying off debt and then pushing the payment into the next lower debt until you are debt free.

Benefits of the Debt Snowball Method

The benefit of the debt snowball method is to satisfy your inner need for “quick fixes,” says Taylor. Backup faster financial victories Eliminating a debt from your budget allows you to move forward when you might otherwise feel less motivated to keep going.

“Often when you keep paying debt and you don’t see any change, people get discouraged and just don’t want to pay more or pay the minimum or stop following their plan. ” She explains.

Leslie Tayne, a financial attorney with over 25 years of experience, agrees that the primary benefit of this method is to encourage the debtor to see progress on their repayment and continue on a financially healthy path.

“Emotionally and mentally, you can see accounts paying out faster, so some people like it because it offers faster (psychological) payouts,” Tayne said.

[SEE: Things to Do When You’re Deep in Debt.]

Disadvantages of the Debt Snowball Method

Because the Debt Snowball Method completely prioritizes internal motivation rather than saving the absolute maximum on total interest accrued, you may not save as much money on total payments as you would if you were making the most expensive — but most Toughest Debts to Pay – would tackle first. That’s because the debt you prioritize using the debt snowball method isn’t necessarily the debt with the highest accruing interest.

Debt snowball method vs. debt avalanche method

The debt snowball and debt avalanche techniques are “the two most common debt-payment methods” for typical consumers, Taylor says. Both are accelerated repayment techniques, but the debt avalanche method can potentially save you hundreds of dollars more in interest than the debt snowball method.

This is because the debt avalanche method reverses the script of the snowball method; Rather than paying off the lowest remaining debt first, the avalanche method dictates that you prioritize any additional payments on the highest-ranking debt interest rate First. It might work best for a disciplined individual who can intrinsically maintain their motivation to repay.

Nonetheless, both methods will help you pay off your debt faster than if you only made minimum payments on all of your debts each month.

“There is no single method that works best for everyone,” says Tayne. She notes that your family circumstances, your present and future liquidity, and the types of debt You can all consider which accelerated debt repayment method or methods you want to try.

“There are so many factors that go into determining the best method possible — what’s really going to be the most successful and motivating for the individual debtor trying to pay off their debt,” says Tayne, adding that “within flexibility must be in place these methods” due to changing personal circumstances. What’s more important, she says, is making consistent payments and reassessing each month how much you can actually afford to invest past the minimum in your repayments.

[Read: Best Budget Apps.]

When should I use the Debt Snowball Method?

Consider the debt snowball method when you’re losing motivation to continue making on-time minimum payments, let alone pay down larger amounts of debt each month. The Debt Snowball helps you visually see the total amount of debt that’s disappearing and gives you a strong psychological boost to keep going as you hit additional benchmarks — even if you don’t necessarily save the most money in the long run.

“Most Americans have multiple credit cards or multiple types of debt,” Taylor says. “I think as long as you have three or more debts, you should start thinking, ‘What’s my repayment method?'”

The debt does not necessarily have to come from different types of loans or lines of credit; For example, you might have large balances on several different credit cards or owe money on several student loans. But regardless of how much debt you have, Taylor suggests picking a debt-payment plan when you accumulate about $5,000 in total.

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What is the Debt Snowball Method? originally appeared on usnews.com


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