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Debt Management

Pros and Cons of the Debt Snowball Method

12/14/2022
One of the biggest sources of stress in many of our lives is debt. There's just no other way to put it: debt sucks. No one likes owing someone money. Period. So, how do we get rid of this burden hanging over our heads?
 
There are many strategies out there that you can use to pay down your debt. Two particularly popular methods are the debt snowball method and the debt avalanche method. Both methods feature tried-and-true techniques that work to help you pay off your debt. As with any action plan to manage your debt payoff journey, you need to be aware of both the pros and cons to each method in order to choose the right strategy that will work for you.
As you have probably guessed, both the snowball method and the debt avalanche method use snow as a way of illustrating how they work to help you pay off your debt. For today, let’s focus on both the benefits and the drawbacks of the debt snowball method.

What is the Debt Snowball Method?

Imagine you are at the top of a tall snow covered hill. You reach down and pick up some snow and pack it into a snowball. Then, you take that ball and roll it down the hill. As the snowball rolls, it starts to pick up more snow as it gets bigger and bigger. At the same time, the ball starts to roll faster and faster. Every second this snowball is getting larger and picking up more speed. By the time it reaches the bottom of the hill, it’s 6 ft tall and moving fast enough to take out a car. This small ball of snow that you could once hold in your hand is now so large you couldn't pick it up if you tried. The Debt Snowball Method takes this same concept and applies it to your debt.
 
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If you are someone who is dealing with debt from multiple credit cards or loans and you need some early wins to keep you motivated and on track with your debt payoff plan, the debt snowball might be for you.

How Does the Debt Snowball Method Work?

Now that you have a good picture in your mind for what this method is, let's dive into how to get the ball rolling on your debt-free journey by implementing this technique (pun intended!)

Let’s say you have 3 different credit cards with a total combined balance of $5,000.
 
  • The first card has a balance of $1,500
  • The second card has a balance of $500
  • The third card has a balance of $3,000
In order to implement the debt snowball method, the first thing you need to do is organize your debt from smallest to largest.
 
  1. $500 - Card #1
  2. $1,500 - Card #2
  3. $3,000 - Card #3
Next look at how much the minimum payment is on each card. To make things easy, let’s say that the minimum payment is 1%. Using the examples above, this would mean you'd have to pay a minimum payment of $50 in total each month toward these credit cards.
 
  • Card #1 - $5
  • Card #2 - $15
  • Card #3 - $30

Once you get your debt in the correct order and start making your minimum payments on each card, now it's time to get your debt snowball rolling!

Picking up Speed

You took a look at your budget and determined you have $100 available each month to pay towards your credit card debt. You already know (from the example above) that you need $50 to cover your minimum payment requirements. Once you take care of the minimum payments on all your cards, you're left with $50 of the original $100.
 
Since the debt snowball method works by attacking the smallest debt first, you would take the remaining $50 and pay it towards Card #1 that had an original balance of $500. Since, as we determined above, the minimum payment on this card is $5, your total payment to Card #1 will now equal to $55 for the month. This process helps speed up how quickly you're able to pay down that credit card.
 
  • Card #1 - $55
  • Card #2 - $15
  • Card #3 - $30
To keep this momentum going you will continue to make these payments until Card #1 is paid off. Once Card #1 is paid in full, your snowball starts to grow and hits Card #2. Next, take the $55 you were previously paying towards Card #1 and apply it towards the next lowest balance, Card #2. This would be the card that had a balance of $1,500 and a minimum payment of $15. This increases your payment on Card #2 to $70 and speeds up the process of paying down its balance.
 
  • Card #1 - Paid in Full
  • Card #2 - $70
  • Card #3 - $30
Once it is paid in full our snowball gets even bigger and is at top speed as you take the full $100 and apply to your largest and only remaining credit card, Card #3.
 
  • Card #1 - Paid in Full
  • Card #2 - Paid in Full
  • Card #3 - $100

This $100 payment hits this credit card like a speeding snowball and wipes out this debt in a matter of months and now you are debt free! You can see why the snowball method is my favorite debt pay-down method and is what I used to pay down my own credit card debt of $27,000 several years ago.
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BONUS TIP: Be sure to take a look at your current expenses for places you can cut back while you're paying off debt. By tweaking your current expenses, you can avoid working against yourself by adding to your debt while trying to pay it off.

Pros of the Debt Snowball Method

The biggest pro of the snowball method is that you get to experience several wins throughout your debt payoff journey. Focusing on debt with small balances instead of spreading payments evenly across all debt allows you to see credit cards and lines of credit paid off quicker, giving you a boost of motivation along the long journey that is paying off debt.
 
In fact, many people using this method to pay off their debt will get to experience their first win pretty quickly (often in a matter of months). This is because a lot of us have relatively small debts mixed in with our larger debts. Experiencing quick wins means you're more likely to stay the course and continue with your debt payoff plan.
 

Cons of the Debt Snowball Method

If you haven't noticed already, the debt snowball method completely ignores interest rates. The only thing that matters with the snowball method is that you pay your smallest balance first and your largest balance last. This may mean that you end up saving the debt with the highest interest rate last, causing you to pay more in interest over the course of your journey.
 
To provide some more perspective using our example from above, I ran the numbers (with a few tweaks because my example minimum payments were lower than you’d actually end up paying), and I found that it would be cheaper and faster to pay down the balances with the highest interest rates first (Avalanche Method) instead of paying down the smallest balances first (Snowball Method). It would cost you an additional $32 in total interest and also take you 5 months longer to pay off all of the debt using the Debt Snowball.
 
Even though there is some time and money savings that comes with choosing the Avalanche Method, the difference is minor. It might still work better for you to go with the Snowball Method because of the small wins you get throughout your journey. Sometimes seeing a small credit card paid off early on is just the motivation you need to stay on course.

So, if you are someone who is dealing with debt from multiple credit cards or loans and you need some early wins to keep you motivated and on track with your debt payoff plan, the debt snowball might be for you. If you’ve tried out the snowball method before let me know how it went and if you liked it.