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 anything specifically 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 accounts 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 accounts, except the $500 one, which you’ll pay all of the remaining $100 budgeted. After 5 months, the $500 debt would be fully paid and the remaining ones are reduced to: $500, $550, $875, and $1075.
Now, you’ll repeat the same process by paying $25 to all, except the $500 one, which you’ll pay $125 per month ($100 from the original $500 debt that was paid off, plus the $25 you have been paying). After 4 months, the second 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 Variations
There are many variations of the Debt Snowball methods, i.e., Debt Snowflake, Debt Avalanche, Debt Deluge, etc.
I first heard about Debt Snowflake from Paidtwice (site now gone). 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:
- Debt snowflaking at SavingAdvice.com
- 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
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
More Articles On Dave Ramsey’s Debt Snowball
Here are additional articles about Dave Ramsey’s Debt Snowball:
- Debt Snowball – The Truth About How to Get Out of Debt at Dave Ramsey
- How to Start and Manage a Debt Snowball at Mrs. Micah
- Debt Snowball Method at Christian Personal Finance
- Eliminate Debt with the Snowball at Zen Habits
- Finance Tool : Debt Snowball Calculator at The Happy Rock
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.
Pinyo is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.