I recently paid off all of my credit cards using the snowball method. This is one of two main debt paying strategies. The other one is known as the avalanche method. What’s the difference?
With the avalanche method –
An individual pays off debt starting with the highest interest account first. The reason for doing this is that over time, said individual will pay less in interest to their debtors, thereby saving the most money.
With the snowball method –
The individual paying off the smallest debt first. After that smallest debt is paid, the individual moves to the next debt, taking the entirety of that smallest payment along with it. Let’s take a look at how that works.
Debt 1 – $250
Debt 2 – $1,000
Debt 3 – $5,000
Let’s say the minimum payment for all of your three debts is $50 a month and you have pinched pennies to the point where you can throw an extra $200 a month at your debts. With the snowball method, you’ll knock at the smallest debt in just one month. When attacking the second debt, you’ll take that $50 minimum payment and add the $200 extra plus the $50 minimum from the first debt and throw it all at Debt #2 while still paying the minimum on Debt #3. This means that after the smallest debt is paid, the individual is paying $300 a month on debt #2. Once that is paid, you’ll apply that $300 to the $50 minimum payment on your largest debt, paying a total of $350 a month until it’s gone.
This strategy is not the most efficient. It is the most effective.
“What? That doesn’t make sense at all,” you might say.
And you’re right. It doesn’t make sense.
Human beings don’t make sense.
The effectiveness of the snowball method comes down to the psychological reaction to setting goals and reaching them. More people are successful with the snowball method because they set small goals within the larger arc goal of paying down total debt. As the small goals are met, the individuals encourage themselves to continue. If you’re still a bit lost, here are some links that break the basics down in different ways.
Uncle Dave Ramsey is one of the most popular people in the world of personal finance. He loves the snowball method and it’s a large part of his financial peace university.
Here’s the official Wikipedia page. Because if you’re at all interested in the snowball method you know you were going to end up here at some point. Might as well include it.
Other people having success with the snowball method:
Not everyone loves Dave Ramsey and not everyone loves me, either. I’ve been collecting some success stories on twitter. There definitely wasn’t a shortage of people who were willing to share…
@zerodayfinance – zerodayfinance.com “I used the debt snowball method to pay off my student loans. I graduated with a BS without any debt, but it cost $15k to finish my last semester of grad school. I had 2 loans, one $4,000 and the other at $11,000. I paid the minimums on both, and then put an extra $500-600 towards the small loan, finished that one off in about 6 months. Then I took those minimum payments and added them to the big one, in addition to the extra $500-600 a month. Once that big loan got down to about $2k, I just paid it off in one fell swoop”
@pennieswesaved – thepennieswesaved.com “We’ve used the debt snowball! Just paid off over 40k and still using it to pay off my husband’s student loans.”
@sidehustledad – sidehustledad.com “Hey Matt, seems like you got some good stories already, but I paid off $18k in CC debt using the snowball method. and managed to increase credit score to 820 in the process!”
@MSawsandMJanes – http://www.mitersawsandmaryjanes.com/paid-off-18k-credit-card-debt/ – This is a freshly launched blog from someone who just paid off quite a bit of debt using the snowball method.
So yes. The strategy works and works well. I would like to point out one more small tidbit that can be very helpful.
You don’t hear about this very often. A snowflake is something small that you spend money on that can and probably should go away. Every day, rather than packing your lunch, you go hit an all you can eat buffet on your break with a few work friends. You spend, after the buffet, the drink, and the tip, $12 every single day on your lunch break.
Let’s say that you’ve decided to cut back to one of these trips per week. Packing your own lunch cuts your lunch spending down to $5 a day. This saves you $28 a week. That’s a snowflake. And snowflakes can and should be applied to your debt. I don’t care who you are, there are snowflakes in your life. I’m a pretty frugal character and even I recognize that there are some snowflakes in my own finances. For maximum debt paying, seek out the snowflakes in your life, cut them out, and add them to your payments.
So what’s the plan now?
I’ve got some student loan debt. I’m going to start tackling it. I kept all of my credit card accounts open. I log in and see the $0 balance and it helps to motivate me to continue on this path.
One of my credit cards is a cash-back credit card. All of my purchases now go on to that card and I pay the balance every time my paycheck hits my account. This, to some folks including myself, is a form of passive income. I’m now making money for myself by spending money. It’s the first time I’ve had any success with passive income and I gotta say….I like it. And none of it would have been possible if I hadn’t decided to pay off my debts and move forward with my life.
Round two is about to be in full swing.
Thank you for reading.