If you’re in debt, you might think that the best way to pay it off is to tackle the highest interest debt first. It does make logical financial sense because overall there would be less interest to pay, saving money in the long run.
However… there’s a massive downside to this method of debt repayment – it could be quite some time before you see any of your debts completely eliminated.
The fact that you might have to wait for a while to see some progress then presents the very real risk of you wanting to give up, planting you firmly back at square one again. I’ve experienced this myself several times whilst battling with debt over the course of 15 years.
I tried desperately to pay off debt, throwing any spare money I had at my debt with the highest rate of interest for a few months, only to undo all the good work I’d done when I gave in to an impulse buy or when an unexpected bill cropped up. The consequences of giving in triggered a cycle of emotional spending. I felt bad that I failed, so I thought I might as well go all in and fail even more.
I ended up continuing to spend on credit for a few months and then trying again to tackle the highest interest debt first when I came to my senses again. The trouble was, I’d be in the same amount of debt as when I tried to eliminate it months before – sometimes the debt was even higher at that point!
For me, paying off the highest interest debt first JUST. DID. NOT. WORK. What did work (and worked well) was the debt snowball method, made famous by Dave Ramsey
How does the debt snowball method work?
You know how a snowball starts off very small but gets bigger when you keep rolling it along in the snow? It builds momentum and turns into a giant snow boulder, right? Well that’s how the debt snowball method works too.
You start off by listing down all your debts by the smallest to largest and basically you pay off the smallest debt first. So for example if you have a loan at £8000, a credit card at £2500, car finance at £3700 and you owe some money to a friend for £300, you’d pay your debts off in the following order:
- £300 debt to a friend
- £2500 credit card
- £3700 car finance
- £8000 bank loan
When using the debt snowball method to pay off debt, you simply forget about interest rates completely. You just pay off your lowest debt with any spare money that you can find (whilst making the minimum payments on all your other debts).
When your smallest debt has been eliminated, you’ll no longer need to make a minimum payment on that debt. So instead, you use the money that you were putting towards that particular debt along with any spare money you have to put towards the second smallest debt, until that one is also paid off. All the while, you’ll be continuing to make minimum payments on your other debts.
You’ll continue to eliminate your debts in this way, using the money that you’re saving by clearing debts as you go along, to pay off your other debts. Eventually, you’ll have just one debt left – the largest one and all your money will go towards that one until it’s cleared.
You’ll then be debt free. Go right ahead and do a victory dance like Chandler…
Why is the debt snowball method so… well, quite frankly, fantastic?
I’ve explained how the debt snowball method works but now I’m going to tell you WHY it works! And why it worked so much better than paying off the highest interest debt first for us.
1. You’ll see results – fast
If you really want to get out of debt, you’ll want to get out of debt quickly I’m sure. One great benefit of the debt snowball method is that you can start putting a dent in your debt pretty fast as small debts can be eliminated much more quickly than large debts. Your debt will decrease before you know it, as you blow each debt out of the water!
2. You’ll have more disposable income in a short space of time
By eliminating the smallest debt first, that’s one debt completely gone. No longer will you have to service that debt. Even though you’ll be using the money that you were originally paying on that debt to work towards your other debts, the bottom line is that you’ll have more free cash in your bank each month. That’s more of your money that won’t be lining your creditor’s pockets. When the second smallest debt is gone, you’ll have even more disposable income.
3. You’ll be SO motivated to carry on paying off debt
There’s nothing better than seeing a debt get eliminated. No more worrying about that debt, no more bills from that creditor, it will just be gone. The emotional feeling you’ll get when you finally get rid of just one debt will spur you on to keep going so that soon, your next smallest debt will be gone. Forever!
4. Your financial behaviours and mindset will gradually start to change
As you pay off debt, you’ll see in a shift in the way you think about and view money. The bitter taste that debt leaves you with will start to wear off as you regain control of your finances and start kicking that debt to the kerb!
5. If you give up, you’ll have already made progress!
Paying off debt is hard, no matter which method you choose to eliminate it, however with the debt snowball method, you’ll be making progress very quickly at first. So if you give up and go on a spending spree, the damage caused emotionally won’t be half as bad as if you were trying to pay off the highest interest debt first.
That’s because you’ll probably have already cleared at least one debt! You’ll have a good chance of getting back on the road to debt repayment quickly because of the progress you’ll have already made.
Will the debt snowball method work for everyone?
If your largest debt also happens to be the one with the largest interest rate, then the debt snowball method of eliminating debt may not be right for you. But it really depends on how you’re coping with your debt and how much willpower you have to actually get your debt paid off.
If you can’t see the wood for the trees when it comes to your debt (like how I used to be), then I’d recommend trying the debt snowball method. The psychological effects of getting fast results really does help. Just getting rid of one debt is such an amazing feeling!
For further reading on getting out of debt, check out these resources:
- Debt Success Stories Series on Disease Called Debt
- Debt Elimination Tips on Disease Called Debt
- The Total Money Makeover by Dave Ramsey
What are your thoughts on the debt snowball method?
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20 Comments
I think the debt snowball method works great if you have several smaller debts. For someone like me who only had/has a $25,000 car loan and a $50,000 student loan, it doesn’t exactly apply. Although, since my car has been paid off, I definitely see all the “fantastic” benefits of it!
Amanda @ My Life, I Guess recently posted…How Working for Minimum Wage Affected My Mental Health
Getting rid of $25,000 of car finance IS fantastic! Congrats! 🙂
My dilemma with the snowball method is that one of my smallest loans only costs us $28 per month. I want to pay it off, but it always seems like doing so won’t benefit us at all. That’s probably just me stubbornly clinging to the “highest interest rate debt first” mindset that I *know* won’t work — we actually need to clear up these little loans before we’ll be able to put a substantial dent into my highest interest rate student loan! How do you combat feeling like what you’re doing isn’t “enough”?
Alexandra @ Real Simple Finances recently posted…Financial Success Requires a Network
I stuck with the avalanche method most of the time, but eventually I got tired of it since one of my high interest private loans was $20,000+. I ended up snowballing all my smaller federal loans, but I did do those in order of highest to lowest interest (even if the private loan was higher than all of them). I still saved some money on interest, and it helped to keep me motivated. I was also able to lower my minimum monthly payments, which is helpful in case an emergency comes up.
Debt Hater recently posted…Save Money On Car Insurance – Defensive Driving Course
I used the debt snowball entirely at first, but now I kind of a do a combination of snowball and avalanche so I can save a little more on interest.
Kayla @ Shoeaholicnomore recently posted…Financially Savvy Saturdays Ninety Ninth Edition
Snowball method worked in my situation because I was able to pay my debt more easily having only a few debts after paying off those with small interests. And, it let me focus more on paying it off in the soonest time possible. The next time I have a list of debts, I would use again this kind of method.
Jayson @ Monster Piggy Bank recently posted…5 Things Your Business Needs To Be Innovative
I think the debt snowball is definitely the way to start, for all the reasons you listed above. After we paid off our first few smallest student loans, we have switched up our methods. We started tackling the most achievable loan that gave us the biggest bang on monthly payment. For example, one loan might have a $6,000 balance left and a $100 monthly payment. Another might have $8,5000 left and a $175 payment. Well, that extra $2,500 in balance is still (to us) achievable in a short-ish period of time, and getting rid of that extra $75 in payments is a big deal to us – it provides us some breathing room “just in case”. So after each debt is paid off, we are constantly examining which loan makes sense next – it’s always one of the smallest ones, but it’s not always *the* smallest one.
Kirsten recently posted…7 Staycation Ideas for Summer Break
I’m with you! Big fan of the debt snowball! It prioritizes the most important factor in becoming and staying debt free – our behavior. Nobody has an interest problem., but a lot of people have a debt problem.
Luke Fitzgerald @ FinanciallyFitz recently posted…Why Is Money so Hard to Talk About?
While I’m not a huge DR fan, I do see the appeal of the snowball in a lot of circumstances. However, one of our smallest loans – under $3400 – is my grad school loan. The interest rate is only 1.75%, and the monthly payment is just under $100. While according to the snowball method, I could use that $100 toward something else, I just can’t bring myself to prioritize something at such a low rate. Also, since we took out a home equity loan to consolidate consumer debt, I’d much rather put extra funds toward that, since our house is on the line for it.
Amy @ DebtGal recently posted…Priceless to Me & 2015 Meal Plan #29
Many times the best way to make progress in your financial goals is to get positive reinforcement. That’s my favorite thing about the snowball method, you get immediate gratification as you tackle each debt individually.
Dane Hinson recently posted…How I Evaluate and Select Index Funds
I am a great fan of the snowball method of debt elimination because I have used it in eliminating several of my debts. However big or small your debt maybe, it is worth trying and you will be surprised at how it will help boost your confidence in achieving your goal.
Esther recently posted…Interview Tips: 11 Things You Must NEVER Do
I love the snowball method! Debt is definitely a mental battle for me and I’m all about instant gratification, so I love to see fast results. It really makes me feel better to see debt wiped away and it makes me want to stick with it!
Kristin recently posted…How To Sell Stuff On Ebay And Make Money
I like that you mentioned the shift in mindset! I never really thought about the connection between seeing immediate results with the debt snowball and NEEDING that kind of reassurance at the beginning, whereas when you’re finally down to paying off the last, large debt, you’ve probably developed a lot of better habits and a stronger financial mindset to help you get through that last hurdle.
Mel recently posted…Financially Savvy Saturdays #100
I understand why people object to the snowball method but maintaining motivation is important and if tackling the small ones first does that – then you will save more interest by actually following through with paying it off vs. tackling the big ones first, losing steam and then letting interest pile up anyway.
May recently posted…How Meal Prepping Can Help Your Weekly Food Budget
We used a personal variant of the snowball method and it really helped us being able to see the numbers going down and striking off the smaller debts so we felt like we were winning!
We prioritised the ‘dangerous’ debts first – the ones with debt collection agencies and on the verge of going to court! Monthly we would tackle one of them (with a full and final offer) + a safer debt like our credit cards.
By doing this we cleared our defaulted debts but also reduced payments on our credit cards which were eating away at available funds to pay for the big debts!
Might sound very confusing but it worked for us!! 🙂
Natalya
x
Natalya @ Cottage Retreatist recently posted…The debtfree dilemma
I’m already a fan of the debt snowball so I can only cosign (your post, not loans) 100% and say you are spot on!
Toni @ Debt Free Divas recently posted…Financially Savvy Saturdays #100
The term “snowball” is used for both approaches – paying highest interest OR smallest first. I always suggest people should look at their debt list and find a method that works for them, see these examples http://debtcamel.co.uk/debt-options/snowball/snowballing-examples/
Sara @ Debt Camel recently posted…The 0% deal that actually costs 11.25%
Thanks Sara – great examples in your article. In this post, I was referring to snowballing the debts with the smallest interest rates first, just because of the motivation factor – getting rid of small debts is very satisfying. Worked for us! 🙂
We chose to use a personal variation of the snowball method to get rid of a few of our debts that we were in trouble with and then move on to the DR method. We need more money in our pocket monthly because I’m having a baby in a couple months and need the extra cash (for my unpaid maternity leave) sooner rather than in the long run.
Hi Ashley thanks for commenting, I’m glad you found a way to manage your debts. It’s important to think about short term financial needs just as much as the long term. Congratulations on your pregnancy and I wish you lots of fun and happiness when your little one arrives!