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Eliminate Debt with the Snowball

Every Tuesday is Finance & Family Day at Zen Habits.

Sometimes when we’re in debt, it feels like we’re drowning, trying to stay afloat, and yet we don’t know how to get out of the turbulent waters we find ourselves in. If you feel yourself being pulled under by the current of debt, there’s hope: by using a Debt Snowball, you can pull yourself out.

This article might seem too simple for those who regularly read about personal finances, but sometimes it’s good to review the basics, and for those who haven’t read much about debt elimination, this can be a life saver.

The basic idea of the Debt Snowball is that you apply an extra amount of money every month to your smallest debt until it’s paid off, and then take the amount you were paying for that debt and apply it to the next biggest debt, and so on until you’ve paid off all your debts. It sounds simple, but it’s very powerful, and it’s something that I’m using a modified version of it now to get myself out of debt. I’m about midway through — I’ve paid off a few smaller debts, I’m nearly done paying off my credit card (should be done this summer) and then hope to pay off my car by the end of this year and some medical debts by next year. Dave Ramsey is the biggest proponent of this method.

Here are the basic steps:

  1. List all debts from smallest to largest.
  2. Commit to pay the minimum payment on each debt.
  3. Find an extra amount, on top of the minimum, that can be applied towards the smallest debt — this amount is your “snowball” amount.
  4. Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
  5. Then, add the old minimum payment from the first debt to the extra amount, and apply the new sum to the second smallest debt — your snowball amount has just gotten bigger, and will get bigger after each debt is paid off.
  6. Repeat until all debts are paid in full.

Alternate version: Some people advocate ordering the original list not from smallest balance to highest, but from highest interest rate to lowest. This way, you’re paying off the debts that are hurting you the most before the ones with low interest rates. Now, this makes some financial sense, and it is probably best for those who are already good at paying off debt. But I have two points to make: 1) the interest saved by this method isn’t really that much (many times we’re talking about the difference of $50 a year or so); and 2) for many people (including me), there is a big psychological boost in paying off that first, small debt, and you can ride the momentum of this boost to keep you going. This is the same reason I suggest starting any goal with baby steps — it might seem too easy, but there’s a lot of power in the sense of accomplishment that comes from achieving any goal, large or small.

Some suggestions for following the Debt Snowball method:

  • Find as big a snowball amount as you can afford. Notice I said “afford” — don’t put a larger amount than you can afford, or you will end up stopping the snowball method. But try to find as much extra money as possible — cut your spending in other areas. Bring lunch to work. Stop going to the movies or expensive restaurants. Cut out cable TV. Stop drinking those fancy coffees. See How I Save for more ideas.
  • Resist temptation to spend your snowball. Often there’s a strong urge to spend the extra money you have once you’ve paid off one debt. But think of it this way — you’ve been living without that extra money just fine so far. It may have taken some penny-pinching, but you’re surviving. Keep going without it, and pay off your debt as soon as you can. Maybe once you’ve finished off your debt-elimination plan, you can take a small amount of that and add it to your spending amount.
  • Keep the end in mind. When things are tough, just visualize what it will be like to be out of debt. For many of us, debt is a huge stress on our lives. Getting out of debt will be like lifting a burden off of your chest, and will feel wonderful! You can do this. Think about what a huge amount you pay towards debt each month, and how nice it will be to have that extra money once you’re done. You can save for a vacation, or a new home, or retirement. It will be a godsend.

Some debt snowball resources:

See also:

Brilliant comments (8)

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Neal Patrick Says:

March 22nd, 2007, 13:26 pm

Another alternative is to pay off the debt with the highest ratio of monthly minimum to debt - this actually can accelerate the snowball effect! So, a student loan with a monthly payment of $200 on $5000 gets paid down quicker than a credit card balance of $20 on $2000. It’s all about increasing cash flow, baby!

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zenhabits Says:

March 22nd, 2007, 18:49 pm

Thanks for the suggestion, Neal … that method would definitely work. Great idea!

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Debt Settlement Advice Says:

April 26th, 2007, 21:20 pm

Another way to eliminate debt is going through debt settlement if done properly you can save yourself a tremendous amount of money and get you out of debt fast. And with the right organization handling your situation it can be pretty hands off saving you the mental strain of getting out of debt yourself. However the above advice is pretty darn good for someone who has the time and extra money to really handle it on their own.

Best Wishes

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Amy Bass Says:

June 10th, 2007, 19:43 pm

Thank you so much for your article. It is exactly what I am working on now. =)
I want to be debt free more than anything. In fact I have made a goal to pay off $72,900 worth of debt by April 2009 and have set up a blog to track my progress. http://www.MyDebtFreeGoal.com
You have a fantastic site and I will be visiting again.

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young women Says:

June 29th, 2007, 3:50 am

this site is interesting.. it going to help a lot with debt management.
just follow the step given.
thanks to this site..
spending can put you to a lot of trouble right?.. in case your in that problem. just use the method.
anyway, there are also site that can help a lot. so before you get into trouble, make sure you take few step by gathering lots of information.

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The Debt Settlement Guru Says:

August 5th, 2007, 17:47 pm

The debt snowball is an effective method for debt reduction for consumers who have a spending problem that underlies their debt issues. For consumers who are in a debt predicament because they cannot afford the payments altogether, debt settlement is definitely an effective alternative. The reason why the debt snowball is effective, however, is because it accounts for the fact that debt is as much a psychological problem as it is financial one.

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fairdealondebt Says:

September 25th, 2008, 9:38 am

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free divorce papers Says:

June 12th, 2009, 2:09 am

I think paying off the smallest debt first boosts the morale and gives a better motivation that we can be debt-free soon.

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