What is the Snowball Method
The Debt Reduction Snowball Method is a strategic plan to reduce or pay off debt that follows a simple emotional process. The Snowball Method directs the consumer to pay down their consumer debt using the smallest balance first. For example, using this method a consumer would review his/her debt accounts and list them in the order he or she wants to pay them off. The lowest debt would be first (#1), then the second (#2), and so on, with the highest debt being the last on the list. In creating this chronological pay-off list, the consumer would not take into consideration the interest rate assigned to the debt.
Following this manner allows the consumer to more quickly feel a sense of accomplishment (a win!) during their debt reduction process. Smaller debts are paid off and emotionally the consumer feels a sense of momentum building. This feeling increases the chances that the consumer will stick with the program until all the debts are paid off.
How does the Snowball Method work?
The Snowball method works by paying a little extra on your credit account with the lowest balance. You can do this in two ways:
- Pay only the minimum balance on all your other debt accounts so you can funnel more money to the #1 account on your Debt Elimination plan.
- Make more money. Work overtime, find a side hustle, or land a part-time job. Remember you only need to add a little extra to the first pay-off account. This can be any amount from $15-100 dollars.
You should choose a constant amount that you can pay every month regularly. Don’t choose a lofty amount because it sounds good on paper. Keep it manageable.
You should determine how much in total you are spending monthly towards debt elimination. Let’s say that amount is $500 per month. After your first debt account is paid off, you do not reduce your monthly spending towards debt elimination and pocket that money. Instead, you should continue your budget as-is and roll over that amount onto debt #2.
When Debt #2 is paid off, roll over everything onto Debt #3 and so on. By the time you get down to your fourth and fifth debt accounts, you will notice how large your monthly payment is towards reducing those accounts. This large payment will help reduce these accounts quicker.
See the example chart below
What are the Benefits of the Snowball Method
It has been shown that emotions play a big role in our ability to manage and rehabilitate our spending habits. Emotions are tied to our purchase decisions and our regret over those decisions. It has also been shown that patience, or a lack thereof, often gets in the way of debt reduction plans. We tend to want results quickly, and when goals aren’t achieved as quickly as we would like, we drop the ball. The Debt Snowball Method appeals to the human side of debt reduction and doesn’t simply look at the math alone.
There is no such thing as the perfect debt reduction plan or a one-size-fits-all debt elimination scheme. People in debt must evaluate the situation from a personal standpoint and take appropriate action, even if that action is extended over some time.
Essentially, it’s better to pay off your debt in three years with consistent payments and managed expectations, rather than struggle with on-and-off payments and constant disappointment over three to five years.
What are the Cons of the Snowball Method
One disadvantage of the Snowball Method is that when compared to other methods, such as the Avalanche Method, the consumer ends up paying more money in interest. Because the Snowball method doesn’t consider interest as a factor in the payment plan, sometimes high-interest debt is not the first to be paid off.
If the high-interest debt isn’t paid off first, the debt reduction payment plan can take longer to achieve. For example, because more interest payments are made over time, you can pay as much as 15-30% more in payments. Spread out over time this increase in payments can span a few months to a few years. No one envisions what can seem like a lifetime of payments coming out of their monthly budget, and this is what the Snowball effect can feel like over time.
Should you use the Snowball Method to pay off debt?
The short answer is yes. You should use the Snowball Method to pay off your debt. It is the quickest way to achieve your initial goal of paying off at least one debt account. Having a “win” can motivate you to press on and endure the process which can take years to complete. Paying off debt is an emotionally taxing endeavor and the sooner you can pat yourself on the back for a [small] job well the better.
Encouragement goes a long way
Encouragement goes a long way in debt elimination, and small rapid-fire wins are great ways to stay inspired, motivated, and committed to win.
Once you’ve paid off one to three bills and you have some emotional momentum, you can always reevaluate your debt-elimination strategy. You can change at any time. No one is keeping score.
The key to a sustained debt elimination plan is to adjust and pivot when necessary. It doesn’t matter so much what route you take just so long as you continue moving a little bit forward with each step. This isn’t a sprint, it’s a marathon, and the one who holds out until the end wins, regardless of the strategy.