The debt snowball method is a debt reduction strategy where you pay off debts in order of smallest to largest, gaining momentum as each balance is paid off. When the smallest debt is paid in full, you roll the money you were paying on that debt into the next smallest balance. It looks something like this:
Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.
An Example of the Debt Snowball
Say you have the following four debts:
1. $500 medical bill ($50 payment)
2. $2,500 credit card debt ($63 payment)
3. $7,000 car loan ($135 payment)
4. $10,000 student loan ($96 payment)
Using the debt snowball method, you would make the minimum payments on everything except the medical bill. For this example, let’s say you have an extra $500 each month from taking a side job and cutting your expenses down to the bare minimum. You are gazelle intense.
Since you’re paying $550 a month on the medical bill (the $50 payment plus the extra $500), that debt will be done in one month. You would then take that $550 and attack the credit card debt. You can pay $613 on the plastic (the freed-up $550 plus the $63 minimum payment). In about four months, you’ll wave goodbye to the credit card. You’ve paid it off!
Now punch that car loan in the face to the tune of $748 a month. In 10 months, it’ll drive off into the sunset. Now you’re on fire!
By the time you reach the student loan—which is your biggest debt—you can put $844 a month toward it. That means it will only last about 12 months. After that, Sallie Mae better get used to living somewhere else, because you’ve kicked her out!
Thanks to your hard work and sacrifice, you have paid off $20,000 of debt in only 27 months using the debt snowball method! Congratulations!
If you need more help, check out more information on credit restoration!