The Debt Snowball is Dave Ramsey’s preferred method for eliminating consumer debt, and has proven to be an effective way to get out of debt. The Debt Snowball isn’t without its critics, and you’ll see why in just a moment. But overall, I think it is an effective way to reduce debt because it gives you something many debt reduction methods don’t offer: tangible results and the motivation to follow through.
How the Debt Snowball Works
The Debt Snowball, which is featured prominently in Dave Ramsey’s Financial Peace University, assumes you are using a balanced budget and are dedicated to getting out of debt. A zero based budget works best for this debt reduction method because it gives each dollar a job and you will have a good idea of how much money you have to repay debt each month after meeting your remaining expenses. This is essential because you will need to repay as much debt as possible each month for this to work quickly and effectively.
- List all your debts (excluding mortgage) from lowest balance to highest balance, regardless of interest rate. (Only consider interest rate when two balances are essentially the same, then list the highest interest rate first).
- Write down the balance and minimum payments.
- Make the minimum payment on each balance except the smallest balance, which you will pay extra on until it is eliminated. You will want to direct every available extra dollar you can find each month to this balance.
- Pay off lowest balance, then direct the funds you were paying on that balance to the next smallest balance.
- Repeat the process.
You can see how each minimum payment will be added to the previous payment, creating the snowball effect.
The Debt Snowball Paradox
Wait a minute? That doesn’t make sense! You aren’t paying off the highest interest rates first! It will take longer to repay your loans!
This is the most controversial feature of the debt snowball. It’s true that, all things being equal, you could pay down your debt faster by repaying your debt with the highest interest rates first. But the thing Dave Ramsey preaches is “personal finance is 20% head knowledge and 80% behavior.”
By paying off your lowest balances first, you get quick wins which creates momentum and motivation. If your highest interest rate is also your highest balance, you will see a minimal improvement each month on your largest bill, and little to no improvements on the remaining bills. Conversely, if you eliminate a couple smaller bills quickly, you will not only see those bills eliminated (which is motivating!), but you will see a larger dent being taken out of your remaining bills each month as your payment snowballs into larger and larger monthly payments.
Pros and Cons of Debt Snowball
As with anything, there are pros and cons. Here are a couple thoughts I have about the debt snowball, and I welcome you to share your experiences or thoughts as well.
Advantages of using the debt snowball:
- Psychological advantage of quick wins.
- Organized method for repaying your debts.
Disadvantages of using the debt snowball:
- Not the most effective method mathematically.
Set up Your Own Debt Snowball Spreadsheet
You can create your own Debt Snowball by using paper and pencil, creating spreadsheet with Excel or Open Office, using a free Excel Debt Snowball spreadsheet, or using a financial management software program like You Need a Budget, which helps you create a working zero based budget and comes with a free Debt Snowball spreadsheet.
What are your thoughts on the Debt Snowball Method? Have you used it? Did it work for you?