What is the Snowball Method?

Snowballing your debt can help you become debt-free faster.

The debt snowball doesn’t actually involve snow, but it can be a way to get you debt-free faster.

Would you snowball your debt? It sounds like a fanciful term, but it’s a powerful method to help manage your debt.

The debt-snowball method, popularized by finance author Dave Ramsey, is a form of debt management usually used in repaying credit card debt. Using the debt-snowball method, extra cash is dedicated to paying debts with the smallest amount owed. By paying the smaller debts first, you see fewer bills as more individual debts are paid off. This can be a huge boost to your morale as you begin to eliminate your debt.

The Run Down

  • The debt-snowball method is a form of debt repayment.
  • It helps you to identify all of your debt.
  • It’s based on the principal that when it comes to most problems, people have a tendency to take care of the smaller, easier issues first.
  • The debt-snowball method isn’t for everyone, but it can work well if you are able to meet all of your minimum payments on all debts.

The basic steps in the debt snowball method are:

  • Listing your debts from the smallest amount to the largest.
  • Figuring out the minimum payments due on each loan.
  • Budgeting extra money towards the smallest of the loans.
  • For the smallest loan, paying the minimum plus any extra available money until that loan is paid off.
  • Repeating the process until all debts are paid in full.

The method gets it name from the theory that, by the time the last of the debts are reached, the extra amount of money paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow.

There are debts that aren’t typically included as part of a debt-snowball plan, such as a first home mortgage. Retirement contributions are also sometimes postponed when using the method; this is a decision that can have a tremendous impact on your future as the extra money can help you to become debt-free sooner, but the loss of the compounding interest on your retirement contribution will be lost. A compromise is to make the minimum contribution that your employer will match.

It is important to note that the debt-snowball method is only for those who are able to make at least the minimum payments on their debts.

The Takeaway

The debt-snowball method can help you to pay down your revolving debt, but it might not be the best fit for you financially. Where do you begin when it comes to determining what you can afford, when you can afford it, and how? AmOne can help you to identify the right financial solution for your need. Our knowledgeable associates are ready to guide you through the process of determining your debt and the best way for you to pay it off. AmOne offers solutions; your call to us is free and we won’t try to sell you anything. Find out how to reach us and learn more about how AmOne can help you today.