Debt Snowball: When to Use It, and When Not To (Financial Planner Explains)
Saving money on debt snowball when use does not have to be complicated. We rounded up the essentials so you can spend less and skip the guesswork.
Key Takeaways
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- Table of Contents Toggle At a GlanceHow The Debt Snowball Method WorksDebt Snowball vs.
Table of Contents
ToggleAt a Glance
- Research shows the debt snowball is most effective when someone has several debts, because paying off a small balance first increases follow-through.
- With only two or three debts, the behavioral advantage is less clear.
- You can compare both approaches easily, and this guide shows you how to calculate which one works best for your situation.
When you’re buried in debt and unsure where to start, momentum can make all the difference.
I frequently recommend the debt snowball method to people who feel stuck. They want to get out of debt, but the next step is not clear. What they need most is a quick win, something small but meaningful that proves progress is possible.
That is where the debt snowball can help.
In this guide, I will walk you through exactly how the method works, when it tends to be most effective based on what I have seen, and when I typically recommend choosing a different approach.
How The Debt Snowball Method Works
In Dave Ramsey’s Baby Steps, the debt snowball comes after saving a $1,000 emergency fund.
The idea is simple. You list your debts from smallest balance to largest, put all extra money toward the smallest one, and pay the minimum on everything else.
When that first debt is gone, you move to the next smallest.
Each payoff gives you a clear sense of progress, which is why people frequently describe it as a snowball gaining speed as it moves forward.
Here is an example to show how this looks in real life:
DebtAmountInterest RateCredit Card #1$50018.4%Credit Card #2$4,50013.2%Auto Loan$3,2008.5%Student Loan$25,0006.2%Here’s the order you’d pay them off in:
DebtAmountInterest RateOrderCredit Card #1$50018.4%1Credit Card #2$4,50013.2%3Auto Loan$3,2008.5%2Student Loan$25,0006.2%4Upon elimination of the lowest balance, you’d then move on to the next smallest debt:
DebtAmountInterest RateOrderCredit Card #1$018.4%Credit Card #2$4,50013.2%2Auto Loan$3,2008.5%1Student Loan$25,0006.2%3Debt Snowball vs. Debt Avalanche
The most popular alternative to the debt snowball method is the debt avalanche, which entails paying off your debts in the order of highest interest rate to lowest interest rate (while still making the minimum monthly payments on your other debts).
So, keeping with the previous example, using the debt avalanche your debts would be paid off in the following order:
DebtAmountInterest RateOrderCredit Card #1$50018.4%1Credit Card #2$4,50013.2%2Auto Loan$3,2008.5%3Student Loan$25,0006.2%4The main advantage of the avalanche is that it saves more money on interest and, on paper, gets you out of debt faster.
In this example, using the snowball costs about $309 more in interest and adds an extra two months before you are debt-free.
However, that is not always how it works in real life.
If you want help running the numbers, our science backed Get Out of Debt spreadsheet can help. It lets you list your debts, compare payoff order, and see how long each method would take using the exact same monthly payment. You can download it for free on our Get Out of Debt page.
When the Debt Snowball Method Works Best
There have been a few interesting studies that have compared the two methods.
First, a study from a team at Northwestern University found that the debt snowball method was a better strategy for those with multiple credit card debts.
Similar results were found in a study published in The Journal of Consumer Research were they found:
“People are more motivated to get out of debt not only by concentrating on one account but also by beginning with the smallest.”
This research lines up from what I have seen personally.
The people who benefit the most from the debt snowball are the ones who feel completely overwhelmed by multiple debts.
They may have three or four credit cards, a car loan, student loans, and other balances competing for their attention.
They want to make progress, but they do not know where to start.
When someone is juggling numerous debts, the snowball gives them a simple first step and a clear, achievable goal.
Paying off one small balance provides a win they can actually feel. That win builds confidence, and confidence builds momentum. Five d
Final Thoughts
The bottom line: a little research on debt snowball when use goes a long way. Compare your options, watch for seasonal offers, and never pay full price when a better deal is one click away.
Originally published at thewaystowealth.com.
R.J. Weiss
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