Dave Ramsey’s Debt Snowball

By Pinyo, on March 3, 2009

If you’re a regular personal finance blog reader, chances are you’ve heard about Dave Ramsey and Debt Snowball. Personally, I have mentioned both Dave Ramsey and Debt Snowball a few times, but never write directly about it. In this article, I’d like to provide a brief introduction, an illustration, and links to related resources.

What Is Dave Ramsey’s Debt Snowball Method?

A Debt Snowball is a debt elimination strategy popularized by Dave Ramsey, a renowned debt and personal finance guru. Under this method, you reduce your debt by paying the minimum monthly payment to all debts, except the one with the smallest balance, which you’ll try to pay down as fast as you can.

The basic steps in the Debt Snowball debt reduction plan are as follows:

List all debts from smallest balance to largest. Note, there are people (including me) that advocates paying highest interest rate debt first, but that’s not the Debt Snowball method.
Pay the minimum payment on every debt, except the smallest debt.
Pay as much as you can towards that smallest debt until it is paid off.
Once the smallest debt is paid in full, repeat the process by paying as much as you can toward the second smallest debt.

The idea is that you’ll be able to pay more toward the “smallest” debt each time a debt is fully paid off.

How Does Dave Ramsey’s Debt Snowball Work?

Let’s say you have 5 outstanding debts in the following amount: $500, $625, $675, $1000, and $1200 — note, the interest rate is irrelevant. To keep this simple, let’s assume each debt requires a minimum payment of $25 per month, and ignore the increases in amount owed due to finance charges. Also, let’s assume you’ve budgeted $200 per months to pay off your debt.

The first month, you’ll pay $25 to all debts, except the $500 debt, which you’ll pay all of the remaining $100 budgeted. After 5 months, the $500 debt would be fully paid and the remaining debts are reduced to: $500, $550, $875, and $1075.

Now, you’ll repeat the same process by paying $25 to all debts, except the $475 debt, which you’ll pay $125 per month ($100 from the $500 debt that was paid off, plus the $25 you originally paid). After 4 months, the second $500 debt is paid off (notice how it’s faster than the first $500), and the remaining debts are reduced to: $450, $775, and $975.

Rinse and repeat…

An Illustration Of The Debt Snowball

Here’s the example in a table format to help you visualize the process.

debt-snowball

Debt Snowball Variations

There are many variations of the Debt Snowball methods, i.e., Debt Snowflake, Debt Avalanche, Debt Deluge, etc.

Debt Snowflake

I first heard about Debt Snowflake from Paidtwice. Debt Snowflake is debt reduction plan based on Debt Snowball, but the idea is to actively find and use additional income to pay even more than the budgeted amount toward your top priority debt. Here are a few articles about Debt Snowflake:

Snowflaking – A Primer at I’ve Paid For This Twice Already…
Debt snowflaking at Gather Little By Little
Finding Snowflakes to Add to Your Snowball at Being Frugal
What Are Debt Snowballs Made Of? Debt Snowflakes! at Get Rich Slowly
Coins can be snowflakes at Sense to Save
Snowflaking Will Melt Your Debt And More! at My Super-Charged Life

Debt Avalanche

The concept of Debt Avalanche is not new, but I believe the term is first used at Consumerism Commentary. Debt Avalanche is similar to Debt Snowball, but the idea is to pay off the highest interest debt first — something I also advocate and wrote in my debt reduction guide. Here are a few articles about Debt Avalanche:

The Correct Way to Pay Off Personal Debt: The Debt Avalanche at Consumerism Commentary
To Debt Snowball or Debt Avalanche, That Is The Question at Bible Money Matters
Avalanche or Snowball? at How to Make 7 Million in 7 Years™
Debt Avalanche? Correct? at Beating Broke

Other Debt Snowball Variations

Supercharging the Debt Snowball at Plonkee Money
Debt Deluge – Modified Debt Snowball at No Credit Needed
Alternate Debt Snowball Theory: How Annoyed Are You? at Poorer Than You

Debt Snowball Calculator

Also, here are two very nice debt reduction calculators to help you decide which method is best — i.e., smallest balance or highest interest rate first.

Snowball Calculator at What’s The Cost?
Debt Reduction Snowball Calculator at Vertex 42

Debt Snowball Software

You Need A Budget, or YNAB, is a high quality budgeting software that you can try free for 60 days. Beside for being an excellent budgeting software, it also comes with a Debt Snowball spreadsheet. This spreadsheet will guide you step-by-step in the process of getting yourself out of debt as quickly as possible — i.e., list all of your debts, decide which debt to pay first, how much to pay, and how long it will take for you to get out of debt.

By becoming familiar with these debt reduction plans, you’re empowering yourself to get out of debt and avoid bankruptcy. If you don’t know which one to choose, you can’t go wrong with the Debt Snowball method.

This article was featured in the Carnival of Personal Finance at Stock Trading To Go.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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13 Comments

the weakonomist
March 3, 2009, 21:28

I’m a fan of the snowball method for anyone that has trouble with structure and discipline. Sure the math doesn’t always work out in their favor, but Ramsey understands the psychology of personal finance better than anyone else.

This is a really great all-in-one explanation. You my friend are bookmarked.
Christopher Murphy
March 3, 2009, 21:49

You might want to really think about this – why would you first pay the highest interest rate and not the highest monthly finance change?

I’ve seen this on 1000 times over the years and it makes no sense. No one has ever written about this..ever!

You are NOT being charge an interest rate people..wake up. You are being charged a FINANCE charge every month. Those are two different things. Why are you looking at an interest rate? Who cares what that is when you’ve got the true amount you’re being charged. It’s the finance charge. If you look at ALL of your credit cards and lay them out in front of you. Which has the highest finance charges per month? Pay that down first! When it reaches the same amount as the next finance charge make equal payments on both of those…and repeat when those reach the next lowest finance charge. As you reach a point where they’re all the same charge keep paying them equally until they’re gone forever.

Make sense??
Sid
March 3, 2009, 22:46

I agree that this is a great explanation. I like much of what Ramsey but am getting weary of the Ramsey worship. How did a basic tenant of debt reduction become “Dave Ramsey’s Debt Snowball?” I’m waiting for the trademark symbol and some litigation threats.
Pinyo
March 3, 2009, 23:07

@weakonomist – Thanks!

@Christopher – I understand what you’re trying to say. However, finance charge is just the product of interest rate and the amount owed. Let’s take three debt for example (annualized for simplicity)

A. $1,000 @ 15% = $150 in finance charge
B. $500 @ 30% = $150 in finance charge
C. $200 @ 20% = $40 in finance charge

According to your argument, I should pay debt A before B.

Let’s assume, I can pay minimum amount on 2 and $100 on the one debt I want to focus on. Notice that I can pay down debt B in 5 months versus debt A which takes 10 months. By paying debt with highest interest rate first, I can save more money — i.e., eliminate $150 in finance charge (annualized) in 5 months versus 10 months.

Make sense?

@Sid – I am hardly a Ramsey worshiper and I called him out on what I thought was a bad advice before. Whether we like it or not, Dave Ramsey has done a good job of teaching this method and his name is now synonymous with Debt Snowball.

As far as trademarking Debt Snowball, I don’t know if he did it or not…got to check it out.
Peter
March 4, 2009, 10:17

good look at the debt snowball, especially enjoyed your graphic aids!

I think people like to complain about how Ramsey isn’t “good at math” or how his methods are for people who can’t add. The problem is people don’t get into debt by only using math – and you have to take into account the psychology when getting out of debt as well. Thus, with the debt snowball method you get those quick wins to keep you motivated and moving towards the goal of removing the debt.

If people are motivated and want to use another method to get out of debt – more power to them! As Ramsey himself says, you can’t go wrong getting out of debt! Choose the plan that works best for you, and just DO IT!
Adam @ Checkbook Diaries
March 4, 2009, 11:51

Great article! I love this idea, have heard about it before, and am actively involved in a debt snowball of my own. I will say, though, that this article might be my favorite summary of this debt repayment method. I agree with Peter that using this method is a great way for staying motivated with quick wins. As to the idea of snowflakes, I advocate the use of windfall money like annual bonuses or tax refunds to accelerate debt repayment.

Enjoy the site (just added you to my blogroll), keep up the good work!
Bob
March 4, 2009, 12:09

Great article pinyo! While the concept is pretty simple, the illustration makes it even easier to understand!
AJC @ 7million7years
March 4, 2009, 17:52

@ Pinyo – Thanks for the reference; Now, I have a totally new variation, called the Cash Cascade here:

http://7million7years.com/2008.....ascade-tm/

This video addresses the fundamental problem of paying down debt … it’s not ALWAYS a good thing; you see, the old ‘good debt v bad debt’ argument only comes into play when you are thinking of ACQUIRING DEBT.

So, the Cash Cascade is based on the principle that ONCE YOU ARE IN DEBT there is no such thing as ‘good debt’ and ‘bad debt’ any more, only ‘cheap debt’ and ‘expensive debt’ that you should exploit (carefully) for building wealth.

Let me know what you and your readers think

AJC
Nationwide DR
March 5, 2009, 11:50

Thanks so much for the taking the time to post this information. With the economy the way it is right now with all the layoffs and more to come; government spending and deficit out of control; the continued housing slump; one wonders where to turn for help. It sure is nice to know that there are companies out there that can help folks such as myself. Thank you.
BobV
March 11, 2009, 15:44

Great article! I am a Dave Ramsey fan and facilitate the class at my church. I doubt he would have a problem with any of the variations of the plan to get out of debt. The baby steps he uses are just that, baby steps and the idea is to celebrate the small victories which then lead to bigger victories. As others have said, if you have the discipline to attack higher interest rate ones, then more power to you.
Mr Plasectomy
March 13, 2009, 9:15

We follow the Dave Ramsey plan in our household. I tried for years to get my wife to be onboard about paying off all the debt ASAP, she wasn’t having it. Since he is a Christian my wife was more than willing to jump on board, why that needed to happen is beyond me, but it worked and we are trying to accomplish this goal. His plan for her because money has an emotional effect on her and having those small victories as we knock a debt down one by one keeps her motivated. As Dave Ramsey says; I am the nerd and she is the free spirit.

Living a life of indulgement was nice for a few years: eating out, buying stuff, and no budgets got us where we are today. The economy is now a wakeup call to get our act together a minimize the risk.
KLSmith
July 7, 2009, 0:55

The best thing anyone can do is pay off their debt as fast as possible. Drive old cars and eat beans. That is what I did.
Joel
January 5, 2010, 3:06

Although I love most of what Dave Ramsey says the Debt Snowball is actually one of the two biggest areas where he is flat out wrong and I can prove it: http://www.creditcardchaser.co.....ead-wrong/

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