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The Snowball Method


In the personal finance world, snowballing is a debt repayment strategy that focuses on knocking out your debts as quickly as possible, regardless of the interest rate. You take as much money as you can and throw it (think of throwing a snowball) at the debt you have with the smallest balance. After that small debt is repaid, you "roll" the money into the next smallest balance so that debts are knocked out one at a time. This helps build momentum and keeps you motivated because you get fast results. Dave Ramsey is a huge believer in the debt snowball method. In fact, it’s step two in his tried and true “7 Baby Steps.” Here is how the debt snowball method works:


  1. List all of your debts from smallest to largest. Don't pay attention to interest rates or what the debt is.

  2. Pay everything you can at the smallest debt while only paying the minimum amount due on all of your other debts.

  3. When the smallest debt is paid off, snowball the money you were throwing at it toward the next-smallest debt until it is paid off. Repeat.


This method can be really effective at tackling debt and is easy to plan out. For example, let’s say that you have two credit cards, a vehicle loan, and a mortgage. Here is what you would potentially be paying each month:


Credit Card 1: $500 balance with a minimum payment each month of $50.


Credit Card 2: $2000 balance with a minimum payment each month of $100.


Vehicle loan: $12,000 balance with a monthly payment of $350.


Mortgage: $200,000 balance with a monthly payment of $1000.


To use the debt snowball method, you would pay off Credit Card 1 first. The total minimum payments for the example above is $1500 a month. Hopefully, if you've been reading this column for the past year, you've been able to increase your usable income at least a little bit. You would throw every dollar you could at Credit Card 1 while only paying the minimum payments on your other debts. After Credit Card 1 is paid off, you would focus your efforts on Credit Card 2. Take the $50 you are accustomed to paying on Credit Card 1 and apply it in addition to the $100 minimum payment to Credit Card 2 until it is paid off. After that, apply that $150 to the vehicle loan and then eventually tackle the mortgage.


The key to this method working is not taking on any new debt. It also requires having discipline to put all of your extra money toward your smallest debt. Some financial experts argue that it’s not the smartest method because it requires that you ignore interest rates. However, this method is designed to keep you motivated throughout the process by paying off debts quickly. Will it be hard? Yes, very hard. Will it be fast? No, the above example will take a couple of years. Will it work? Yes! As long as you don't continue to go into debt.


I hope you'll take the time to list your debts from smallest to largest and consider the snowball method if you struggle with debt. If your mindset is right and you really want to get out of debt, then I challenge you to give it a try. You are your only barrier to living a debt-free life! Look for an article coming soon on the "Avalanche Method," which is similar to the Snowball Method but focuses on interest rates rather than the balance.


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