If you’re interested in personal finance you’re probably familiar with the, “debt snowball” method of debt repayment. Popularized by author and radio talk show host, Dave Ramsey, the debt snowball is a debt reduction method whereby you list your debts smallest to largest and pay them off aggressively, one at at time.
Example: Let’s say you owe 3 debts. A $1000 debt with a $100 minimum payment, a $10,000 debt with a $300 minimum payment and a $15,000 with a $450 minimum payment. Once you start the snowball, you pay the minimum payments on each of the debts each month ($100+$300+$450) then throw whatever extra money you have on the smallest debt. So in this example, you’d pay $100 a month for the next 10 months (or less), until the smallest debt is paid in full.
Once your smallest debt is gone, you “roll” the minimum payment you were paying on the first debt ($100) into the minimum amount you pay on the second debt ($300), for a total of $400 payed each month until the second debt is paid in full. Get it? The snowball is rolling downhill and you’re benefiting from it’s momentum! Rinse and repeat, on the 3rd, and biggest debt, until all of your debts are gone!
The theory behind why the snowball works is simple. After you pay off your first, “little” debt, you’re totally stoked and proud of yourself. So proud, you want to do it again (and again) until you’re debt-free! While I didn’t follow the snowball plan, I understand why it would be very motivating.
If the debt snowball is so, “great”, why didn’t I use it?
- I wanted to pay the loans with the biggest interest rates first. Basically, I’m
pessimistica realist and I wanted to make sure if I lost my job or had an emergency, my loans with the highest interest rates were paid first. - The debt snowball would have cost me more money. I planned to pay off my $30,000 student loan debt in less than 3 years, and actually paid it off (once I really buckled down and got serious) in less than 2 years. In my case, using the debt snowball method wouldn’t have been any faster and I would have paid slightly more in interest since my, “biggest debt” had a 6.8% interest rate and my smallest had a 3.25% interest rate.
- I didn’t, “need” the psychological boast of paying off the small loans. I’m pretty good at motivating myself so I made a poster board “thermometer” documenting my debt payoff. Each time I paid off $100 I colored in a part of the thermometer. I think it was just as motivating as paying off my smallest debt first as part of the debt snowball.
- My debts were similar sizes. I didn’t have a really small debt, so my first, debt payoff “victory” would have been very delayed. Not exactly that instant motivation and gratification that gets you excited about debt pay down.
- A $1000 emergency fund wasn’t enough for me. Dave Ramsey encourages readers to have a $1000 emergency fund while they are, “debt snowballing” their debt. $1000 felt too small for me, so I saved more. It took me a little longer to pay off my debt because I had to build up an emergency fund first, but in the long run that’s what made me feel comfortable.
Don’t get me wrong, I listen to the Dave Ramsey show podcast regularly and appreciate Dave’s, “no nonsense” approach to personal finance. His, “baby steps” help people change their money and their lives. So if the debt snowball works for you, you should use it! It doesn’t matter how you chose to kick your debt to the curb, as long as you stay dedicated and motivated and work “your plan”, whatever it may be.
Did you/are you, “snowballing” your debt? Why or why not?
Image: Kamyar Adl