What Is the Debt Snowball Method? † debt

When you’re drowning in a pool of accumulating debts, figuring out how to emerge isn’t always straightforward. With varying interest rates and payment terms, some people lose faith that they can become debt-free. But numerous strategies can help you stay on track to pay off your balances. Depending on your personality, the feeling of “quick wins” from the debt snowball method can provide the nudges you need to keep making your payments, according to Tanya Taylor, a New York City-based certified public accountant and financial coach with decades of experience in the banking and insurance industries.

What Is the Debt Snowball Method?

The debt snowball method is one of several debt repayment strategies you might consider trying if you hold numerous debts with accumulating interest. Essentially, you prioritize paying off your loans carrying the lowest remaining balances first, slowly building up your metaphorical “snowball” of paid-off debt.

How Does the Debt Snowball Method Work?

First, make a list of every debt – from student loans to car notes to credit card balances – that you still have to repay. Note the respective remaining balances and interest rates. Next, arrange your remaining debt balances in order of lowest to highest.

From there, continue paying the minimum on all of your remaining debt balances every time a payment is due. But under the debt snowball method, any additional payments you can afford to make to accelerate your overall debt repayment should be funneled toward the debt with the lowest remaining balance. Once the smallest debt is paid off, take all the money you were spending on the monthly bill for it and apply it to the second-smallest debt on your list. Continue that pattern of paying off a debt and then driving the payment into the next-lowest debt until you’re debt-free.

Pros of the Debt Snowball Method

The benefit of using the debt snowball method is to feed your inner need for “quick wins,” Taylor says. Securing faster financial victories by wiping a debt from your budget can propel you forward when you otherwise might feel less motivated to keep going.

“If you’re paying on debt over and over and you can’t see any changes, a lot of times people get discouraged and they just don’t really want to pay anymore, or pay the minimum, or follow their plan anymore, she explains.

Leslie Tayne, a financial attorney with over 25 years of experience, agrees that the main benefit of this method is encouraging the debt holder to see progress in their repayment and continue along a financially healthy path.

“Emotionally and mentally, you can see accounts paid off faster, so some people like it because it provides a quicker (psychological) payoff,” Tayne said.

Cons of the Debt Snowball Method

Because the debt snowball method entirely prioritizes internal motivation instead of saving the absolute maximum in total accumulated interest, you simply might not save as much money in overall payments as you would if you tackled the most-expensive – but most difficult to pay off – debts first. That is because the debts you prioritize paying off under the debt snowball method are not necessarily the debts with the highest accumulating interest.

Debt Snowball Method vs. Debt Avalanche Method

The debt snowball and debt avalanche techniques are “the two most common debt repayment methods” for typical consumers, Taylor says. Both are accelerated repayment techniques, but the debt avalanche method can potentially save you hundreds of dollars in interest more than the debt snowball method.

That is because the debt avalanche method flips the script of the snowball method; instead of paying the lowest remaining balances first, the avalanche method dictates you prioritize any additional payments on the debt with the highest interest rate first. It might work best for a disciplined individual who can intrinsically keep up their repayment motivation.

Nevertheless, both methods will help you pay off your debt more quickly than if you merely made minimum payments across all your debts every month.

“There isn’t one method that works best for everybody,” according to Tayne. She notes that your family circumstances, your present and future cash flow and the types of debt you hold can all factor into which method or methods of accelerated debt repayment you want to try.

“There’s so many factors that go into determining what the best possible method is – what’s really going to be most successful and motivating for the individual debtor who’s trying to pay off their debts,” says Tayne, adding that “there needs to be flexibility within these methods” because of changing personal circumstances. What’s more important, she says, is making consistent payments and reevaluating every month how much you can actually afford to drive into your repayments beyond the minimum.

When Should I Use the Debt Snowball Method?

Consider using the debt snowball method when you are losing motivation to carry on making timely minimum payments, let alone chipping away at larger amounts of debt every month. Debt snowballing helps you visually see the total number of debts dwindle away, giving you a powerful psychological kick to keep going as you hit additional benchmarks – even if you are not necessarily saving the most money in the long run.

“Most Americans have multiple credit cards or multiple types of debt,” Taylor says. “I think that as long as you have three or more debts, you should start thinking about, ‘what is my repayment method?’”

The debts do not necessarily have to stem from different types of loans or credit lines; for example, you could carry high balances on several different credit cards or have debt remaining on multiple student loans. But regardless of how many debts you have, Taylor suggests selecting a debt repayment plan when you rack up around $5,000 in total.

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