When you’re in debt, it can feel overwhelming. You might not be sure where to start. The interest keeps building and it can seem like all you’re doing is falling further and further behind. The debt snowball can help. It’s a method of paying off debt that allows you see results fast. This inspires you to keep going until all your debt is paid off.
What is the debt snowball?
The debt snowball is a simple way to pay down, and ultimately pay off, your debts. The best time to tackle your debt is when you’re current on your bills and have a little bit set aside in savings for emergencies.
With the debt snowball, you pay all the minimum payments on your debt. Starting with the debt with the lowest balance, you pay as much extra as you can each month. Once that bill is paid off, you take everything you were paying on that bill and apply it to the next one. As each bill is paid, you pay everything you were paying before on to the next bill, and so on until all your debt is paid off.
How does the debt snowball work?
Let’s say you have four outstanding debts:
- A credit card with a $500 balance and a $25 monthly minimum payment
- A credit card with a $1,000 balance and a $50 monthly minimum payment
- A medical bill for $5,000 and a $100 monthly minimum payment
- A student loan for $10,000 and a $150 monthly minimum payment
You have $200 per month in extra income you can put toward paying off your debt. With the debt snowball, you would start by putting the extra income toward the debt with the lowest balance, which in this case is the credit card with the $500 balance. You would pay $225 on the credit card each month (the $200 extra plus the $25 minimum payment) until it’s paid off. Once that card is paid off, you would pay that $225 on to the next lowest bill, which is the credit card with the $1,000 balance. Your payments on that bill would be $275 per month (the $225 you were paying on the other card plus the $50 minimum you were already paying on that card).
Once that card was paid off, you would apply that money to the medical bill, bringing your monthly payments on that bill to $375 per month. Once that one’s finished, all the money would go to your student loan, making your monthly payment on that $525.
Why does the debt snowball work?
If you start with the debt with the highest balance, it can be discouraging. Yes, you’re seeing the balance go down, but it can feel slow and like you’re not making much of a difference. With the debt snowball, you can see progress. Balances get paid down and debts get paid off.
It’s a bit like going on a diet. If you make changes and see results, it motivates you to keep going. If you make changes and don’t see results, it’s easy to feel discouraged and want to give up. With the debt snowball, you can see tangible progress.
Paying off debt quickly also helps with interest. The more quickly you can pay off your debts, the less interest you’ll pay on the debt, so it’s in your best interest to pay off each debt as quickly as you can. The debt snowball is a manageable way to do exactly that.
What steps should I take to use the debt snowball?
The key to using the debt snowball method is having extra money to put toward your debt. You can free up funds in two ways: cutting expenses and increasing your income.
To cut expenses, take a look at your monthly spending. Are there any areas that stand out to you? If you eat out frequently, for example, you could commit to cooking more often and put the difference toward paying off your debt. If you subscribe to an expensive cable package, consider switching to streaming services and just keep your internet service from your cable company. Talk to your cell phone provider about less expensive service options.
To increase your income, you can either make more money at your current position or look for a side gig. If it’s been some time since you got a raise, consider asking for one. To make a side income, consider joining a ride service or picking up a flexible, part-time job. Although doing extra work can be difficult, it can be well worth it as you see your debts decrease. If you have extra room in your house, consider renting out the room. If you enjoy making things, consider selling your wares online. You can also sell items you’re no longer using online to make some extra money.
It can feel like a sacrifice to cut expenses and increase income. Keep in mind these are temporary measures, though, to help you reach a greater goal: being free of debt.
Once you have extra income to pay off your debts, do what you can to lower the interest on your debts. See if you can transfer balances to a lower-interest credit card. Talk to your student loan servicer about refinancing options. You may be able to consolidate your student loan debt to get a lower interest rate. The lower your interest rates, the better. Lower interest rates will help each payment you make have a greater impact.
From there, start by paying down your debt with the lowest balance. Keep going until you’re completely debt free.
Who can use the debt snowball?
Anyone with debt can use the debt snowball. Even if you can only put a small amount of extra money toward paying down debt, it’s worth doing. Every little bit makes a difference and lowers the interest you’ll pay over time.
Being in debt can feel like a burden. With the debt snowball, you see results, and those results encourage you to keep going.