Debt Snowball Method

What is the Debt Snowball Method?

The Debt Snowball Method is a debt repayment strategy focusing on paying off smaller balances first, regardless of interest rates. The idea is to build momentum by quickly eliminating individual debts, which can provide a psychological boost and motivation to continue paying off larger debts.

How the Debt Snowball Method Works

Think of your payment to one card increasing (like a snowball growing larger as more snow is compacted) each time you’ve paid off a balance.

  1. List Debts: List all your debts, beginning with the smallest balance and ending with the largest balance.
  2. Focus on Smallest Debt: Direct any extra funds towards paying off the debt with the smallest balance while making minimum payments on all other debts.
  3. Snowball Payments: Once the smallest debt is paid off, apply the amount you were paying towards that debt to the next smallest debt. This “snowball” effect means that your payment towards each subsequent debt increases as you pay off each one.

Here’s an example:

Debt Balance ($) Minimum Payment ($)
Debt 1 $500 $25
Debt 2 $6,300 $146
Debt 3 $7,000 $200
  • Start by paying as much as possible towards Debt #1 ($500) while making minimum payments on Debt #2 and #3.
  • Once Debt #1 is paid off, apply the $25 minimum payment from Debt #1 to the minimum payment of Debt #2, making it $171 ($146 + $25).
  • Continue paying the minimum on Debt #3 while aggressively paying off Debt #2.
  • Once Debt #2 is paid off, apply the combined payments from Debts #1, #2, and #3 ($25 + $146 + $200) to Debt #3.

By following this method and consistently applying payments from paid-off debts to the next debt in line, you’ll gradually increase your debt payoff momentum and work toward becoming debt-free.

Remember that this method might not make the most mathematical sense because it doesn’t result in paying the lowest overall interest payments. However, this method focuses on the motivation to get rid of one debt sooner rather than later.

Read more about the other method of debt repayment, the debt avalanche method.

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