If you’ve dabbled in personal finance teachings at all, you may have heard of Dave Ramsey’s Debt Snowball. But, how does the Debt Snowball work – and can it really help you pay off debt faster? Personally, I think it can. Let’s talk about what the Debt Snowball plan is and how it can help you get debt free.
The following post is by MPFJ staff writer,Laurie Blank. Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.
If you’ve dabbled in personal finance teachings at all, you may have heard of Dave Ramsey’s Debt Snowball. The Debt Snowball is a plan Mr. Ramsey created to pay off debt.
But how does the Debt Snowball work – and can it really help you pay off debt faster? In his book, The Total Money Makeover, Ramsey says nearly anyone can get debt free – including their mortgage – if they follow the Debt Snowball plan.
He has dozens of stories in his Total Money Makeover book confirming his claim. But is it true? Can the Debt Snowball work for you? Personally, I think it can. Let’s talk about what the Debt Snowball plan is and how it can help you get debt free.
The Debt Snowball Defined
So, here’s how the Debt Snowball works. You start by listing all of your debts on a piece of paper, in order, from smallest to largest. Next to each debt you list the minimum payment. Here’s an example.
Debt Name Debt Balance Minimum Payment Amt.
Credit card #1 $257 $25
Credit card #2 $1340 $35
Auto loan $12,675 $347
Student loan $20,546 $215
Mortgage $158,695 $1257
Total Debt $193,513
Total Minimum Payments $1879
Once you’ve got your debts and minimum payments listed, you can begin working your snowball. Like a real snowball, your Debt Snowball will get bigger and have more of an impact as it rolls down your hill toward debt freedom. Here’s how it works.
How the Debt Snowball Works
The Debt Snowball works like this:
Step #1: You commit to making the minimum payments on each debt.
Step #2: Using a budget, you put any extra money you have during the month toward the smallest debt you have. In the case of our fictional debt load above, all extra money would go toward Credit Card #1 with the $257 balance.
Step #3: After the smallest debt gets paid in full, you’d take the $25 minimum payment you were making on that debt and add it to your new minimum payment on debt #2. This would make the new minimum payment on debt #2 $60.
In addition to that new $60 minimum payment, you would put any additional money you have during the month toward debt #2 until it’s paid in full.
When debt #2 is paid in full, you’ll take that debt’s $60 minimum payment and add it to debt #3, the auto loan. The new minimum payment on the auto loan would then become $407 each month. In addition, all extra money would go toward the auto loan as well.
Because you aren’t decreasing your monthly minimum payments, but instead putting the old minimum payments on the paid off debts towards other debts, your budget isn’t affected.
After all, you’d been making all of those minimum payments before your debt payoff plan, right? Just keep making them and pretend you haven’t paid off other debts.
The Power Behind the Punch
As such, your extra efforts toward each debt add up to a faster elimination of those debts. When you’re able to find extra money in your budget to put toward your debts, your snowball rolls down the hill even faster.
Extra money in your budget can include:
- The money you don’t spend during the month
- Cash earned from overtime hours or a second job or side hustle
- Unexpected cash, such as birthday gifts
- Cash you expect but would normally spend on other stuff, such as a tax refund
Believe or not, taking this extra money and putting it toward your debts really adds up. Many people using the Debt Snowball say they get out of debt much faster than they expected.
What About the Debt Avalanche?
You may have heard of another debt payoff method: The Debt Avalanche. Some people like the Debt Avalanche plan better than the Debt Snowball plan. The Debt Avalanche plan is where you pay your debts off according to the highest interest rate instead of smallest to largest balance.
The Debt Avalanche plan is a great plan that, from a mathematical standpoint, can save you money over the Debt Snowball. This is because you’re paying less interest right off the bat.
However, the Debt Snowball can be very powerful because it makes for great psychological wins. There’s something super motivating about seeing debts paid in full early on, and you may not have that benefit if you choose the Debt Avalanche over the Debt Snowball.
However, both methods work to pay off debt, and that’s the important part.
Conclusions
If you’re struggling with debt, I strongly recommend trying the Debt Snowball to get out of it. I’ve seen it work for myself and many other people. Try it and see if it works for you.
***Photo courtesy of https://www.flickr.com/photos/pigsonthewing/3256097910/in/
