What is the debt snowball method?
The debt snowball method starts with paying off the smallest debt or accounts with the lowest balances first, and making only minimum payments on all of the other outstanding debts. Once you’ve paid off one small debt, you move on to the next smallest debt, and so on.
You metaphorically “snowball” your debts by tackling the smallest debts first before moving on to bigger debts, chipping away at your outstanding balance. You basically move from the smallest to the largest of your debt in order to clear it.
How does it work?
The debt snowball method involves prioritizing paying off loans with the lowest interest rates first.
For example, if you have $10,000 in student loans at 6.2% interest, a credit card bill at $6,000 with 22% APR, and an interest-free $3,000 personal loan, you would pay off the personal loan first, making only the minimum payments on the others.
After the personal loan is paid off, you would then move on to the other outstanding debts — slowly, but surely, winning the snowball fight.
Debt snowball vs. debt avalanche
The main difference between the debt snowball and debt avalanche?
The debt avalanche strategy involves aggressively paying off your debts — avalanching on them, if you will — starting with debt with the highest interest rates first before moving on, and make only minimum payments on the others.
Re-using the above example with the debt avalanche strategy employed, you would first focus down the $6,000 credit card bill (since it's accruing the highest interest), make minimum payments on the others, and — once the credit card bill is cleared — move on the student loan debt (next highest), and finish with the personal loan (interest free).
Starting with the highest interest rate first saves you money in the long run on interest payments.
Is the debt snowball method the right choice for you?
The snowball method is not without its caveats. While you may be able to pay down your smaller debts in a shorter period of time, you may also be vulnerable to interest charges on your larger outstanding debts.
The debt snowball method may make some people go a little nuts, since it can make the most sense to tackle debts with the largest interest rates first. But multiple small debts add up.
If you're a goal-oriented person who needs small wins upfront in order to keep yourself motivated, then the debt snowball method may be right for you.
Make sure you're also taking advantage of all opportunities to consolidate your debt and reduce your interest rates, so that the debt snowball method doesn't cost you more in the long run.