Which Loans Should I Pay Off First? The Sequence Explained
What happens when you roll a snowball? It gets bigger and bigger until it’s so big it’s practically indestructible.
That’s good fun when you’re a kid. It’s just as fun as an adult when you use this snowball method to tackle your debt
So what is the debt snowball method?
Continue reading to learn what the debt snowball is and how you can use it to eliminate your debts.
What is the Debt Snowball Method?
The debt snowball method is a debt repayment strategy that involves paying off your lowest balances first to gain momentum while you eliminate each credit account.
This strategy is beneficial for paying off high-interest credit card debt, or any non-mortgage debt.
It works like this:
You pay only the minimum monthly amount due for each of your debts. You then take that extra freed-up cash and apply it to the credit card or loan account with the lowest balance. Once you pay that debt in full, you can use the money you were using to repay that account and apply it toward the debt with the next lowest balance.
Each time you pay off a balance, you free up money to use towards another account. In this way, your money grows like a rolling snowball and picks up steam as you pay off more accounts and free up even more money.
Continue this payment snowball strategy until all your credit cards and loan balances are paid off, and you are on course for financial freedom.
How to Use the Debt Snowball Strategy
Here’s an example of the debt snowball strategy in action:
Let’s say you have three debts:
- $400 medical bill — $40 payment
- $2000 credit card debt — $54 payment
- $3,000 personal loan — $90 payments
By employing the debt snowball strategy, you would only pay the minimum payments on all the debts except the one with the lowest balance which, in this case, is the $400 medical bill.
The wisest thing to make the debt snowball method work optimally is to create a second income from a side hustle, such as mowing lawns, starting an online business, or even babysitting. You can find many hacks to save money or make extra money at home to support you and your family. If you have an additional $400 a month, you could pay off the medical bill in one month.
Now you take the $400, plus the $40 payment you were spending on the medical bill, and apply it to your credit card debt. In about four and a half months, that credit card bill will be gone.
That snowball is growing now. You’ve eliminated $2,400 in total debt and freed up $94 a month for your budget (medical bill plus credit card payments). You can now use your $400 extra income plus $94 and apply it to your personal loan, which you’ll pay off in about six months.
In this scenario, you’d be debt-free in less than a year.
Admittedly, we’re using small balances in this example to illustrate how the strategy works. But this method works whether you have three debt accounts and $5,400 in debt, or 10 times that debt.
The Bottom Line: Is the Debt Snowball Strategy for You?
What makes the debt snowball so effective is that it builds momentum.
It’s like a dieter struggling to lose weight. They could cut their calories in half for three weeks, but if they don’t see results on the weight scale, they will quit.
The same goes for debt repayment. If you work on your highest debt account because it has the highest interest, that’s good in theory. But even after cutting back all your expenses to the bare bones, what if you see the needle barely moving?
By nature, we want to see results. And when we do see results, we’re motivated to do even better. That’s the magic of the debt snowball strategy. As a tip, you can help your debt repayment strategy by getting a low-interest loan to consolidate high-interest credit card debts.