What is Debt Snowball?

Simply put, debt snowball is a straightforward method to focus on getting out of debt. In short, you only pay the minimum possible amount for all your debts, except for one liability that you decide to focus on. In the chosen debt, you spend as much as you can to reduce debt and pay it off quickly.

After you pay off the first debt, you take what you pay for the first debt and start spending it on the second debt (along with the initial minimum payment for the second debt, and any extras that you can manage). After the second debt has been repaid, you move to the third debt (where you pay the first minimum + second minimum + third minimum + extra). Etc.

This is called a snowball because the amount you pay to each debt continues to increase (like a snowball grows in size when rolling down a hill). If you have six debts that all have a minimum payment of 24100% per month, plus an additional 24,200 a month that you can charge on debt, you will start paying% 24300 a month for the first debt. After the payment is paid off, you will make a snowball debt payment, so you pay 24400 per month on your second debt, then% 24500 per month on your third debt, and so on. When you have paid off the first five debts, you will pay 24800% a month to that sixth debt. No debt will last long at that level!

Interestingly enough, while most (not all) people in the personal finance area agree that debt snowball is a good thing, not everyone agrees in the best order to pay off your debt.

From a purely mathematical point of view, the best debt to concentrate on the first payment is the one that has the highest interest rate. This is only because, over time, a higher interest rate will end up costing you more money if you don’t focus on reducing it first.

But there are disadvantages if you have large debt with high-interest rates and small debts with low-interest rates. By focusing all your money on high-interest debt, a small debt will continue to last for a long time (because you only make minimum payments to them). So, you can pay a lot of money into your debt for a year, and in the end, you still have the same amount of debt. This can be very discouraging (even if you owe less), and can cause you to leave the snowball.

The second variation of snowballs (promoted by Dave Ramsey) is that you have paid off your debt in the smallest debt to the most significant debt. This method focuses on the psychological effects that we feel good when we have paid off debt, which motivates us to continue to reduce our debt more.

The disadvantage is that this method ignores interest rates, so from a purely numerical point of view, you might pay more.

The third method for choosing which debt to pay first is the method recommended by David Bach. You list, all of your debts and their minimum payments, so based on only your minimum payment working where your debt can pay off the fastest. This may be debt with the lowest amount of debt, but it depends on the actual amount not. After you pay off the first debt, you recalculate your amount and then move to the next fastest debt to pay off, etc.

Again, this method ignores the interest rate, so from a pure money point of view, you might pay more overall. And you have to do some (simple) calculations at the beginning, which can kill some people. But this is the fastest way to reduce the amount of individual debt you have, and increase the “feel good” sensation of paying off your debt.