What is a Debt “Snowball”?

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A reader asked us last week “what’s a snowball?” Fair question. We’re talking money, not weather here at DebtKid.

Here’s the answer, the best that I can give it to you, but it is further explained in the “Total Money Makeover” by Dave Ramsey. (I highly recommend the audio-book personally).

Imagine a snowball rolling downhill. It gets bigger, right?

Some financial experts teach you to pay off your debts beginning with the highest interest rate. Dave Ramsey, on the other hand will teach you to pay them off smallest balance to largest balance. It doesn’t make much mathematical sense, but it does make sense in other ways.

First, it gives you a sense of accomplishment. When you’re feeling crushed by debt, a few quick wins feel really, really good. Good enough to work as hard as you need to in order to get out of debt. There’s a real psychological boost. Second, there’s a cash-flow advantage to it.

Two words of caution. The debt snowball will only work for you if you’re on a budget and planning a certain amount of income each month towards your debt at a minimum (extra is always good too). You also need to have a small emergency cash reserve in place just in case. This is so that you don’t need to resort to creating more debt, but be sure that it is not so much that you might be comfortable being in debt. (Debt-busting is not about comfort and relaxation!)

Here’s how you “roll” the snowball.
1.List your bills smallest to largest citing the total balance owed, and the minimum payment on each.
2.Pay off the bills as fast as you can with the smallest. Plan on a minimum payment for every bill and direct any extra towards the top of the list—the smallest bill. In our house, we knocked out the first three bills for a total of about $200 in the first month. This freed up an additional $200 the next month. There’s your cash flow advantage. Rather than just paying minimums, as soon as you get a small bill out of the way there’s a little extra money wiggle room to make even more progress on the next bill. This month I’m paying off a card that has a $209 minimum monthly payment, which is freeing me to make a whole lot more progress every month on my last remaining debt.
3.Any time you have extra, unexpected money (tax return, birthday card from grandma or yard sale money) immediately send it to your smallest bill. What looked like a bunch of $30 and $50 payments suddenly becomes real money once they’ve all vanished and you have that extra cash every month to throw at the big looming debts.

Many criticize this method because it has no regard for the interest. Certainly, I’d bypass this method if I had a few small medical bills at 0% interest and some payday loans at 800% in the middle, but otherwise, this method if followed with intensity can usually be worked in 18 months to two years, so the difference between one credit card at 8% and one at 12% in my family has made very little difference.

Hope that helps!