There are many personal finance experts, including money guru Dave Ramsey, who promote the efficiency and effectiveness of the debt snowball solution. While it’s true that this method can work for some it is certainly not a one-size-fits-all solution. In fact there is no single correct solution for eliminating debts because every person has different financial goals, money capabilities, and requirements that help them commit to their chosen debt elimination strategies.
The first step of a debt snowball involves the creation of a budget that shows all income and expenses. Debts are listed by placing the lowest balance accounts on top and adding each additional account below in increasing balance size. Your highest account balance will be at the bottom of the list. The debt snowball method does not take the various interest rates on these accounts into consideration.
Moving forward with the debt snowball method you are to make the minimum payment on all your monthly accounts except the one with the smallest balance. You put all extra funds you have to make a large payment on the smallest debt until it has been zeroed out.
For example, let’s assume your lowest balance is $250 with a minimum payment of $35. In addition to your $35 minimum you put every other dollar you have “left over” in your budget towards that debt. If after paying all the minimum payments you still had $50 left in your budget you would send an $85 payment ($35 minimum + $50 left over) to that company.
Once you have eliminated the smallest debt you move on to the next lowest account. All funds used to pay off the previous debt will now go toward this balance while you continue to pay minimum payments on other debts. Continuing our example you should have an extra $35 every month moving forward to pay down the next debt.
The process repeats until all of your accounts have been paid in full and all funds you have remaining go towards the highest balance debt. The process is named the “snowball method” because the payments you are sending to creditors grow larger over time, much like a rolling snowball. You gain psychological momentum by achieving a quick win by paying off the smallest debt first.
Regardless of how efficient and simple the debt snowball method looks there are still some major concerns for some debtors which question the logic of this method, despite the push by personal finance experts.
The biggest controversy surrounding the debt snowball method is the disregard of the interest rate when it comes to account priority selection. The logic here is that if you choose to pay down the debts with the highest interest rates first (without taking balance sizes into consideration) you truly can eliminate debts in a faster period of time. By paying the higher interest accounts you also will be saving money in finance charges.
Depending on how logical your brain is with math the debt snowball may or may not work for you. Yet it is not uncommon for some people to stick to the snowball method purely for the psychological reasoning and benefits rather than pure math.
For instance, the debt snowball method works well for some people simply because they see results much faster. By starting with the lowest balances rather than the highest interest rates more debts are eliminated faster. This can be a huge motivating factor for when you are trying to stay on track for eliminating debts. Conversely, if you start with the higher interest balances it likely will take you much longer to see the debt actually go away even though you’ll limit the amount of interest you pay.
The best way to consider if the debt snowball method will work to eliminate your debt effectively is to start with your own spreadsheet. Gather all of your bills, statements, and income information. Create a budget and then develop a separate list with the debt snowball method strategies in mind. If this doesn’t seem very effective for getting your debts paid off try creating a third spreadsheet with your debts listed by interest rate priority. It will be up to you, your personal finance style, and your income levels for making the determination of how best to begin eliminating your debts.