The debt snowball method is a debt repayment strategy popularized by personal finance expert Dave Ramsey. It is a systematic approach to paying off multiple debts by focusing on clearing them one at a time, starting with the smallest balance first. The method is named “snowball” because, like rolling a snowball downhill, the momentum and motivation to tackle larger debts increase as each smaller debt is paid off.
Here’s how the debt snowball method works:
- List Your Debts:
- Compile a list of all your debts, including credit cards, loans, and other outstanding balances. Order them from the smallest to the largest balance.
- Minimum Payments on All Debts:
- Continue making the minimum payments on all your debts to maintain a good credit standing.
- Allocate Extra Funds to Smallest Debt:
- Identify any additional funds you can allocate to debt repayment. This could be money from your budget, extra income, or windfalls. Take the surplus and apply it to the smallest debt while maintaining minimum payments on the others.
- Pay Off Smallest Debt:
- Focus on paying off the smallest debt aggressively. Once it is fully paid, take the money you were putting toward that debt and apply it to the next smallest debt on your list.
- Repeat the Process:
- As each debt is paid off, roll the freed-up funds into the next debt on the list. The idea is that the amount you’re applying to debt repayment continues to grow like a snowball gaining momentum.
- Continue Until All Debts Are Paid:
- Repeat this process until you’ve paid off all your debts. The strategy emphasizes psychological wins by quickly eliminating smaller debts, providing motivation to tackle larger balances.
While the debt snowball method may not be the most financially efficient strategy (as it may not target higher-interest debts first), its appeal lies in the psychological and motivational boost individuals get from crossing off debts one by one. It can be particularly effective for those who need the positive reinforcement of visible progress to stay motivated.