• Debt Reduction: The Snowball Method

  • by Lauren Russell

Like most Americans, I have debts to pay. Credit cards, student loans, car loans, mortgage payments – the debts just seem to get bigger the older you get and the more you try to fulfill “the American dream.”

I am constantly looking for finance tips – for this blog and my personal life. About three months ago, I stumbled across the Snowball Method for paying off debt. I started on the journey after much research and, already, I have noticed a change in my attitude toward my debt (I have hope!) and how I am paying it down (I am actually motivated and working hard to do it!).

What is the Snowball Method?

The snowball method is a way to pay off all of your debts.* While still making the minimum payments to all of your bills, pay any extra money you have to your smallest debt first. Once that debt is paid off, add the amount you were paying on the smallest debt to the next smallest debt (on top of that debt’s minimum payment). Once that debt is paid off, add that payment amount to the minimum payment amount of the third debt, and so on and so on.

It’s called the snowball method because just as a snowball gets bigger as it rolls on, your payments to the next big debt get higher as each debt gets paid off faster. You’re already used to paying the amount of money, so why not apply it to your next debt when the other is paid off? It is tempting to just enjoy that extra money, but through this method, you can enjoy more money faster. It just takes a little sacrifice and willpower in the beginning.

Snowball Method Steps

  1. Make a list of all of your debts.
  2. Order this list from the smallest debt to the largest.
  3. Add any additional money you can to the minimum payment on your smallest debt.
  4. Continue making minimum payments on all of your bills.
  5. Once the first debt is paid off, add the amount you were paying on the first debt to the minimum payment on your second (next) debt.
  6. Repeat until all debts are paid off.

Snowball Method Example:

Step 1 and 2:

Credit Debt: $2,000 (minimum payment $25)
Car Payment: $10,000 (minimum payment $275)
Mortgage: $125,000 (minimum payment $1,000)

Step 3 and 4 (Until credit debt is paid off):

Credit Debt: Pay $125 (minimum + additional $100)
Car Payment: Pay $275 (minimum payment)
Mortgage: Pay $1000 (minimum payment)

Step 5 (Once credit debt is paid off):

Credit Debt: Pay $0 (card is paid off)
Car Payment: Pay $400 (minimum payment + $125 that was paid to credit debt)
Mortgage: Pay $1000 (minimum payment)

Step 6 (Once car is paid off):

Credit Debt: Pay $0 (card is paid off)
Car Payment: Pay $0 (car is paid off)
Mortgage: Pay $1,400 (minimum payment + $400 that was paid to car)

Frequently Asked Question:

Why start with the lowest debt first? Because it is attainable. It’s all mental. Paying down a smaller debt can be easier and faster, so you are more likely to do it. The largest debt can seem daunting. It is less rewarding because we see how much is still left to pay instead of what has been paid off so far. Seeing the lower debt get closer to zero is the motivation needed to keep going. I know that if I tried to tackle the big guys (student loans, mortgage) first, I would give up within the month. Seeing my credit debt inch closer to zero is so motivating. I actually get excited to pay it because I can’t wait to add that to my bigger bill to see that one drop even faster.

If you are looking to pay your debt off faster, a reverse mortgage may help. You could get a lump sum payment to pay off some or all of your debt. Or, you could get a monthly payment and use part of it to apply to the snowball method. Call one of our licensed experts today to talk about your finance goals and how this loan program can help!

*Please note: Mathematically, the Snowball Method may not be the most efficient means of debt reduction. Debt stacking – pay highest interest rate first, may actually be superior. Although the Snowball Method might not be the fastest way, it has proven success because of the mental victories, as discussed above. It is best to discuss with your financial advisor. This article is for informational purposes only.