According to Money Crashers, the average household has $6,124 in credit card debt ($1,624.60 per account). That means most households have multiple credit cards, each with a balance that hasn’t been paid in full. This is just credit card debt, and doesn’t include school loans, car loans or personal loans. Paying off those debts may seem like an insurmountable task, but there is hope! You can implement a plan to pay off that debt. Today, we will answer the question, “What is the Snowball Method for paying off debt?”
Does Debt Snowball Method Work?
Just like any of the other debt repayment methods, the Debt Snowball Method works if you follow it. With the Debt Snowball Method, you begin by tackling the smallest debts first. This isn’t the fastest way to get rid of the debt, but there is a psychology behind this method that lends many to experience success.
With the Debt Snowball Method, you’ll eliminate the smallest debt much more quickly than a larger debt that may have a higher interest rate. The result are feelings of success and progress. This new excitement is what gives you hope and the realization that you can indeed become debt-free. You are more likely to continue the momentum, tackling each debt until they are all paid off.
What is the Snowball Method for Paying Off Debt?
In order to implement the Debt Snowball Method, you’ll need to first create a list of all of your debts. The list should include:
- The lender’s name
- The total amount owed
- The minimum payment due
- The interest rate
We actually have a Budget Planner that includes worksheets for listing your debts. You can read our review here: Monthly Budget Planner Worksheet – Why You Need to Start Budgeting Today
Your list may look something like this:
- Discover – $4,300, $40, 23.5% APR
- Visa – $2,100, $25, 19.9% APR
- Honda – $9,800, $300, 6% APR
- ABC University – $12,000, $100, 3% APR
With the Debt Snowball Method, you must first identify the debt with the smallest balance. In our example above, you’d begin with the Visa because it has the lowest balance (even though it doesn’t have the highest interest rate).
Implementing the Debt Snowball Formula
To implement the debt snowball strategy, you need to make the minimum monthly payments on all of your debts, except the one with the lowest balance. You will be adding extra to this payment to get it paid off.
In our example, that would mean paying $40 to Visa, $300 to Honda and $100 to ABC University for a total of $440. Visa is has the lowest balance and we want to pay more than the $25 minimum. You could add $175 to the minimum $25 payment and send them $200 each month.
Once your lowest balance is paid off, you will take the money you were sending that company and apply it to the minimum payment of your new debt with the lowest balance. That means, if you paid off the Visa, you would add the $200 you were paying them to the $40 you were sending Discover. You are now paying Discover $440 per month, Honda $300 and ABC University $100.
Repeat this process once your second debt is paid off. In our example, we would take the $440 we were paying Discover (which is now paid off) and add that to the $300 we were paying Honda. That means we are paying Honda $740 per month and ABC University $100.
Once you’ve paid off your third debt, you repeat the process to eliminate the fourth debt. Continuing with our example, we would add the $740 we were paying Honda to the $100 that we’ve been paying ABC University. ABC University is now getting $840 per month, as it is the last and final debt. Once that debt is paid off, you are debt-free!
If you’re like my daughter, math isn’t your favorite subject. Fortunately, there are plenty of debt snowball method calculators you can use online. Both, Nerdwallet and FinancialMentor have calculators you can use. The benefit to using these calculators is that they will reveal how long you can expect it to take to fully pay off your debts.
You can also enter different payment amounts in the debt snowball method calculator to see how much quicker your debt can be tackled by simply adding a little bit more money each month.
Ways to Speed Up the Process
To tackle debt, you need to take a good hard look at your finances. Do you have the extra income to throw at the debt? If not, you’ll need to consider taking action to speed up the process. You can:
- Sell items in your home that you don’t need. You can do this on Facebook Marketplace, through CraigsList or by having a yard sale.
- Take a temporary part-time job and use all of the pay towards the debt. Seasonal towns often need extra help during the summer months and retail stores always recruit part-timers during the Christmas holiday.
- Start a side gig and use that money toward your debt. Think DoorDash, freelance writing jobs and Uber. You could also mow lawns, rake leaves or shovel snow. Perhaps you have some hours free to babysit or take neighborhood pets for a walk.
Every extra dime you can bring in will speed up the debt repayment process and get you to your goal of being debt-free!
Here at Five Bags of Gold, we believe you must have an emergency savings account set up before you tackle your debt, so make that your priority if you don’t already have one.
When tackling debt, you may wish to ask a friend or family member to be your accountability partner. It can be hard to give up that daily Starbucks or take on a second part-time job, but it is so worth it in the end. An accountability partner can help give you the encouragement you need along the way, increasing your chances of success!