Understanding the Debt Snowball

The debt snowball method is a great way to pay off debt, especially if you have several different debts. Put simply, it's a plan that helps you focus on one debt at a time until that individual debt is G-O-N-E. Then you move on to the next one in the list, repeating the process until you can proudly shout "I'm debt free!".

Why It's Called a Debt Snowball

When something snowballs, it quickly gains momentum or increases as it goes. Naturally you don't want that to happen to the debts themselves! Your debt, of course, goes away as you work through it. A more appropriate name for this plan might be the payment snowball method, because it's the payments you send toward your debt that snowball that increase, but that name wouldn't be as catchy. So debt snowball it is.

Still, the snowball concept itself is what matters. Basically, that means the amount you're able to shovel toward your debt grows larger and larger as more and more money becomes available for debt reduction. (And more money becomes available each time you pay off a debt.)

What typically happens next is pretty cool. You get inspired by dramatic progress on your debt reduction, and so you start sending even more money in each month -- knocking out debts faster than you'd ever imagined you could. All of that's a big part of what makes this such a great way to get out of debt.

Setting Up Your Debt Snowball

Setting up your debt snowball is easy. Here's how to do it.

  1. Make a list of all your debts.

  2. Put them in the payoff order that you want. (The recommended order is usually from the smallest balance to largest balance, regardless of interest rate. There's a good reason for this, too. And I promise, it has nothing to do with this. But of course, there's nothing stopping you if you'd rather do something like putting the debt to your mother-in-law at the top of your list.)

  3. Make minimum payments to all the debts in your list, except for the first one. That becomes your target debt; the one you're going to pelt with payments until it's gone for good.

  4. Pay your minimum payment plus as much extra as you can scrounge up toward your target debt. (You can even send extra money as you get it -- just be sure to mark the extra payments as being for "principal only".)

  5. When you've wiped out your target debt, take the money you'd been sending to it and start sending it to the next unpaid debt in the list instead.

  6. Repeat steps 4 and 5 until you've paid off every debt on your list.

  7. Celebrate!

Why It Works

The debt snowball works because it's highly motivating — especially if you organize your debts in the traditional lowest-balance-first order.

Use that order, and you'll typically make quick work of the first debt in your list. That's because instead of sending in (for example) a regular minimum payment of $20 and watching the balance decrease by $5 (because most of your payment went to interest), you'd send in $40 and see the balance go down by $25.

In other words, you make real progress.

You can see that it's working, and that your efforts make a difference. So you keep at it. By the time you get to the larger debts, you already know you can do it. You can see the light at the end of the tunnel, and you're committed to getting to your debt-free destination.

It’s a great way to get out of debt. Get started today. You'll be glad you did.