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The Debt Snowball Method for Reducing Debt

by Ryan Guina

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.

  1. 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).
  2. Write down the balance and minimum payments.
  3. 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.
  4. Pay off lowest balance, then direct the funds you were paying on that balance to the next smallest balance.
  5. 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?


Published or updated May 14, 2010.
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{ 5 comments… read them below or add one }

1 Kirk Kinder

I still recommend folks pay off the highest rate first. I understand Dave’s idea about small wins building to a crescendo so what I tell folks is to tally their net worth each month. As they see it grow, that motivates folks to keep going, and the net worth increases quicker when you pay the higher rate cards and debt off first.

It is all how you mentally program yourself though. Some might identify with my approach while others get more from Dave’s. Just go with your instincts.

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2 Ryan

I can see it working either way. You will have some people who love running the numbers on their net worth and that’s all the motivation they need. While others respond best to seeing debts falling off their list.

I think either way is fine. The key here is directing as much money as you can afford each month to your debt. If you do that you will see quick improvements and eliminate your debt more quickly. This is the case where a plan is better than no plan! :-)

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3 K.C.

If there is plenty of cash flow or enough money in savings to avoid taking on new debt while paying off old debts, then paying off the debt with the highest interest makes sense.

However, if cash flow is tight or there is little or no money in savings, then paying off the debt with the lowest balance makes sense, because it immediately improves cash flow which can either be directed to building savings or paying off debt or a combination of the two.

The key to getting out of debt is to quit adding to the debt. That requires either savings or cash flow well in excess of regular monthly expenses.

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4 Ryan

K.C., the added cash flow is a huge issue, and one that can help people tremendously.

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5 Peter

I think the reason Ramsey has the “quick wins” approach to paying off debt is because so many of the people he’s talking to have a problem with discipline, and need that extra motivating boost to be able to stick to the debt payoff plan. For most people who see the mathematical advantage of highest interest first, many of them probably aren’t in debt in the first place, so it isn’t an issue. As with most things I don’t think the debt snowball is a one size fits all solution, but it is a good solution for those that need it. :)

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