What is a debt snowball?

The Debt Snowball is the best way to get out of debt period. Debt Snowballing involves making minimum payments on all debts except for one, we’ll call it debt A. You pay as much as possible to Debt A until you have paid it off. Next you take the amount you were paying toward Debt A and include it with your payment the next debt, Debt B. As you can see after you pay off 2 or 3 debts you will be making very large payments towards your remaining debts at that time.

What order do you want to take?

Most people use one of two methods to decide in what order they will pay down their debt. Some will choose to start with the debt that has the highest interest rate. That way you may down your most “expensive” debt first and minimize your interest expense. Others will choose to start with the smallest debt to gain a psychological victory and build momentum in their debt snowball. Either method is acceptable; it’s truly up to you. The goal is to start paying down your debt so don’t over analyze this and get caught up in this step.

An example…

Here we will go over an example of a debt snowball. For simplicity these numbers will be easy to work with. We’re starting with three debts; Debt A is $100, Debt B is $200, and Debt c is $300, we’ll assume they all have the same interest rate. The minimum payment on each debt is $10, $20, and $30 respectively. You decide you have $100 per month to pay towards these debs. We’ll be starting with Debt A first, then Debt B, and finally Deb C. The correct allocation for the first month is Debt A: $50, Debt B: $20, Debt C: $30. The second month is the same as the first month, but at the end of the second month Debt A is paid off. The third month is allocated as follows; Debt B: $70, Debt C: $30. You can see how applying the money from your paid offs debts quickly pays down the remaining debt.