The debt snowball method, popularized by Dave Ramsey, is the psychological approach to paying off your outstanding balances. Instead of focusing on how to save the most money in interest while paying off your debt, you focus on giving yourself easily achievable pay off wins to stay motivated.
The method starts by you writing out all your outstanding debts (and their associated minimum payments due each month) from smallest debt to largest debt. Pay no attention to the interest rates. Any additional money that can be applied to your debt must go to the smallest balance first. When the smallest debt is paid off, that money gets added to the minimum payment of the next smallest balance. The monthly payments continue to grow as debts are paid off, meaning larger monthly payments towards your larger debts, hence the name: snowball.
Here’s the debt snowball approach in action:
- Credit Card 1: $500, minimum due $30
- Auto Loan: $4,000, minimum due: $200
- Credit Card 2: $4,300, minimum due: $185
Total due each month: $415, but you can afford to pay $500.
You’re going to take that extra $85 a month and credit card 1, while still paying minimums on the auto loan and credit card 2.
- Credit Card 1: $500, payment $115
- Auto Loan: $4,000, payment $200
- Credit Card 2: $4,300, payment $185
In a few months, that Credit Card 1 will be paid off and you’ll want to do a happy dance, which encourages you to keep pushing forward towards debt #2. You’ll take the $115 from credit card 1, add it to the $200 on the auto loan and be paying $315 per month towards the auto loan. Before you know it, the full $500 is chipping away at Credit Card 2.
See also: The Avalanche Approach