Debt Snowball: The Preferred Method for getting out of debt
Creating a debt snowball is my preferred method of getting out of debt. The strength of using this method is that it focuses on the behavioral side of personal finance rather than the mathematical. Since we are not robots that always do exactly what we know we should, I recommend this method for most people.
Video Intro
These are the simple steps to snowball your debt
- Create a list of all of your debts: credit cards, car loans, student loans, mortgages, etc…
- Next to each one write down the total balance owed.
- Re-order these from smallest to largest debts (use Excel or Google Docs to make this simpler.)
- Pay the minimum payment on all of the debts – except the smallest one.
- Put every extra dollar you can find towards paying off that smallest debt.
- Celebrate like crazy when you get that first debt paid off.
- Take the amount you were paying towards the first debt and put towards the next smallest debt. Do this until this one is paid off.
- Celebrate again!
- Continue this process until each one is paid off.
What you will find is that each time you pay off a debt, the “snowball” gets larger. Since you are taking the amount you used to pay off the first debt and putting it all + the minimum payment that you were already paying to the second together, you are making more of an impact towards that debt. Each time you pay off a debt, the snowball gets larger and more powerful – which is great, because it just increases the speed that each debt gets paid off.
The numbers don’t lie
If you are like most logical people out there (like me 
) you are probably saying, “you could save more money by paying the highest interest rate cards off first.” You are right – calculators do not lie and they will give you the correct logical answer. Paying your credits cards off starting with the highest interest rate to the lowest is “mathematically” the best idea. But, let’s look it at from another angle:
If we DID what we knew we SHOULD do 100% of the time, using the mathematical approach would be best. But, we are emotional beings and even the most disciplined among us still have emotions and are affected by them.
Computers use logic 100% of the time. Humans do not. We were not created to. We make decisions based on our emotions. We get let down, we get encouraged, we feel motivated, we get scared, we feel hopeful, we feel like quitting. These are all emotional states that each one of us could feel on any given day!!
Knowing that we are emotional beings, the key is to use our emotions to our advantage. Just like jogging with the wind at your back, it is a nice little boost to use our emotions to give us a little edge. So, rather than tackling the debt like a math problem, we can tackle it in a way that will give us emotional boosts! After all, isn’t it better to get out of debt and spend an extra $100 in interest than to give up half way to our goal because we were discouraged?
Status Bars and Debt
Ever wonder why there are status bars showing you the progress of the item you are loading on your computer? It is to keep us from going crazy while waiting 10 minutes for the computer to do what we told it!! Even though that little bar moves slowly sometimes, it is encouraging because we know how much longer we have to endure the torture of waiting.
It is extremely DE-motivating when there is no end in sight. Without that “light at the end of the tunnel” it can be hard to keep going. That little bar that shows us the progress that we have made gives us hope. What if there were no status bars? Or what if you saw no progress on the bar until you got to the 70% loaded point? Would you keep waiting or would you reboot assuming it there was a problem?
When on the phone, have you ever been waiting on hold for 15 minutes wondering, “Did they forget about me? Should I wait it out? What if the never remember that I am on hold?” Do you cut your losses or wait it out having no idea when they will pick up, or if they ever will?
This is the advantage of using the snowball approach to paying down debt. If you focus on the highest interest rate, it could be months or even years before you reach that first milestone. Would you have the endurance to keep going that long without reaching that first milestone?
It is a wonderful feeling to be able to celebrate your first milestone – paying off the first credit card is a blast! Speaking from experience, I was fueled with motivation after reaching that first milestone. The fact is that most people are strengthened by seeing even a small goal accomplished. I love the snowball approach to paying down debt because it focuses on reaching these small goals first and using them as motivation to keep going. Let me know how it works for you!
Homework
- Follow steps 1-3 tonight and get your debt snowball rolling!
{ 26 comments… read them below or add one }
What a great article that rings so true!! I have been meaning to get a copy of Dave Ramsey’s book, and this just enforces that idea.
Thank you for a quick breakdown of the process! I love the fact that you mention if we done every thing 100% correct (as we know we should), we would not end up in some of the situations we get into.
@sean
Yea, the whole mathematical process of getting out of debt is based on the faulty assumption that we make all of our decisions mathematically!!
I just discovered your website today- HELP!! I need financial advice- I live in Southern California, and I need the name of a reliable debt counseling service- if you could reccomend one, I would appreciate it.
This is good advice, but it would be better advice to order your debts by paying off the highest interest rate loan first. That way you lower your interest expenses the quickest and have more money to snowball.
While the snowball method may sound pretty good, it actually is not very wise financial advice. Instead, one should work towards paying off the debt with the highest interest rate first. The size of the debt is irrelevant.
I think this is great advice. And I think that you explain why you should pay the lowest debt first very well. Great article!
Very useful, like this one; If we DID what we knew we SHOULD do 100% of the time, using the mathematical approach would be best.
Might right a blog about this as well.
The ‘snowball’ method works. It may not be the most mathematically efficient, but it works, and when I talk to people that are hurting, they are looking for results. They understand they have made mistakes and that is why the snowball method works, because it continues to encourage along the way. The first couple of debts that are paid off, give light to a otherwise dark situation, and every time another debt is paid off it reminds them of where they never want to be again.
I make my financial decisions based on a mathmatical approach. Payoff highest interest first is the only way to go. It’s extremely satisfying to know that I’m saving myself money. Having a spreadsheet that shows you exactly how much you are saving compared to high balance pay off first or no extra payments is a great motivator. Paying based on the balance is bad advice.
The ‘snowball’ method…
Does the ‘snowball’ method really work best? No. it does not.
As Mr. Dave Ramsey will admit, the ‘snowball’ method is not his invention (as he may leads you to believe), and unfortunately the steps presented are wrong – paying the smallest amount or paying the largest interest rate loan – are not the proper methods – please watch your steps.
Hi Dede,
I think you missed the point – he actually says here that this is NOT mathematically the best methods – it’s the best in terms of emotion. If most of operated optimally in the mathematical realm the way we are supposed to we wouldn’t have allowed ourselves to get into debt in the first place.
I wrote an easy to use debt snow ball calculator, it’s completely free if anyone is interested in using it. It calculates based on Lowest Amount, Highest Amount, Lowest Interest, and Highest Interest. You’ll be able to see how long it will really take you to pay everything off, and how much interest you would have paid to pay it off.
http://www.budgetsuccessfully.com/Debt-Snowball-Calculator.aspx
If you have any feed back on the tool let me know.
Dave Ramsey knows what he is talking about……he has helped thousands upon thousands get out of debt, because he understands human behavior, which is what gets us into debt in the first place. Thank you Bob for supporting Dave Ramsey and all his ministry. You are such a blessing and I can’t wait to tell my friends about your site!
I am in financial debt right now. Today, I told myself that I would fast and pray about my debt. I “googled” scriptures on debt and came across your website. I truly believe God led me to your site, and I will try all of these steps. I will keep you updated on my progress.
God Bless,
I went to your website because I wanted to know how to make money blogging. I’m heavily in debt-education loans and other financial nightmares. I looked through your site and read the article on reducing debt. The debt snowball approach made me smile. It’s been hard to smile these last few months, but the approach seemed so simple and appropriate. One thing I used to do with my children when they passed a test, endured the state assessments, performed on stage, or completed a difficult task was celebrate. How appropriate for paying off a bill!
Thank you for making me smile and giving me hope.
P.S. I read the rest of the article. We are emotional creatures in need of emotional boosts. I love math; I’ve been thinking logically and reacting emotionally.
My hubby and I are actually “working” on this…it works! Today’s economy is scary…gotta stay away from credit.
I LOVE this article. I once took a card card information seminar in college where they taught you the interest rate approach to paying down credit cards. Being an engineer, I always thought this was best AND it made the most sense. Little did I know that real life and real emotions don’t always let this happen. My big credit card debts seem so endless but if I pay off the little ones first, that will keep me motivated and well on the path to being debt-free. Thank you for this great article!
I like this article because it challenges the normal thought process on tackling debt. That said, I believe it omits a crucial step prior to starting the “snowball”, which is to find a way to lower the interest of your largest loan. Ask and you shall recieve – negotiate with the loan provider or take out another loan at a lower interest rate and cancel credit cards as you move out the balance (keep one or two). If you can’t move the entire balance to a lower rate move some, you may even be able to put your largest debt on a 0% introductory rate credit card while you pay off your other debts (be careful with this – move it before the grace period ends).
Once you’ve lowered your interest rates as best you can, then start the “snowball” and hopefully your loan with the highest interest rate will coincide with your smallest loan. I applied this method along with other sacrifices and dropped my debt from $30,000 to $10,000 in a little over a year.
I still really appreciate this article and website and kudos to Larry for providing a logical status bar and effectively shining the light at the end of the tunnel.
God Bless,
Bob, I’m loving these exercises. Can’t wait to see what’s coming down the pike. The only debt we have is our mortgage but I still have an opinion about your ‘snowball’ method. Those that advocate paying the highest interest rate–that is great IF IT WORKS for you. If it doesn’t work, and you give up in despair, you got nowhere and are still in trouble.
Also, I’ve noticed that most people suffer with their debt load because of their emotions. We go out shopping and spend, spend to make us feel better. Obviously someone in that situation would do better with the “snowball” method than the mathematically correct one.
I fully understand the smallest to largest debt game-plan. But when seeing that this method will cost us over $1300.00 in additional interest, well, it’s an easy decision for us. Sorry Mr. Ramsey. Sorry Bob. It’s highest interest rate to lowest for us. No amount of motivation gained from paying off the smallest to largest debt could persuade us otherwise. I’ll take the small wins of knowing what I am saving in interest rather than paying in interest.
As Carol stated, you have to choose the method that is most comfortable for YOU, as long as it WORKS. I don’t have a huge amount of debt, so the snowball method works fine because I can eliminate balances before interest rates climb very high. It is so gratifying to see the results! Thank you, Bob, for reinforcing the concept.
The snowball works – and there’s a reason Dave Ramsey calls them Baby Steps … two years after beginning our debt snowball, we can say (as of December 2011) we’re debt-free except for the mortgage. No, it didn’t make sense mathematically, but by starting small (baby steps) the emotional payoff was two-fold: 1) we could celebrate that we’d paid something (ANYthing) off, and 2) our payment toward the next debt was greater by using the payment we’d been making on the smaller debt.
Further into the process we began moving debts around to pay off some higher interest debts, but by then we were believers and knew we would achieve our goal – we no longer needed to convince ourselves with little successes.
Wow! I came across a person who has been making extra money through a blog. I was curious to find out more about bloging and came upon your site. This is going to sound dumb, but I was so cought up in reading about how to start a blog that I didnt realize that you offer the kind of help I am looking for. I am seriously going to go home and do this. Since this is the begining of the year, my wife and I had a goal to catch up on some past due bills so that we could start fresh in 2012 and start paiying off debts. Thank you so much for putting this out there for people like me to be blessed through.
I think the best part of the debt snowball is that it gives you relatively quick results to keep you motivated. If you are able to pay off a $1,000 credit card within a few months, you are motivated versus plugging away at a $12,000 credit card with a higher APR. it is nice to see results right away.
Wow. It is such a simple idea, yet I never thought to look at it that way!
Love your positive take on managing money problems – people everywhere will be feeling a whole lot better. Lots of tips to save money, too. Keep up the good work!
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