As well as having a fun name, the snowball method is a legitimate way to pay off debts.
It may not always be the right way in every situation, but in a lot of cases it can be very effective at helping you pay down debt and take control of your finances.
I’m a big fan of the snowball method.
When used at the right time, in the right way it can help pay down debt and make your finances a little less complicated.
Here’s what you need to know about the snowball method.
What is the debt snowball method?
The debt snowball method works in a very simple way.
Rather than ordering your debt by interest rate and paying debt with the highest rate first, you choose the smallest debt and pay that first.
You order all your debts smallest to largest irrespective of interest rate.
You pay off the smallest debt first while paying the minimums on all the others to maintain your payment history.
Once you clear a debt, you move on to the next.
Let’s use an example.
Let’s say you have the following debts
- Store cards – £125
- Credit cards – £350
- Overdraft – £400
- Payday loan – £550
- Student loan – £11,000
In a typical scenario, you wouldn’t order these in amount order but in interest rate order.
You would pay off the most expensive debt first and work your way up the list until everything is paid.
But what if that student loan was your most expensive debt? How long would it take to pay off?
How would you feel about that over the months and years it would take to pay it?
Now imagine paying off your store cards within a couple of months.
How would you feel then? Probably happy that one debt has gone and you achieved something tangible.
Now use what you paid off the store cards with to settle the credit cards.
You get another boost of satisfaction once they are paid and you can move on to the next.
Those little boosts of satisfaction work like positive reinforcement.
Behave in a certain way and good things happen. It’s the very core of how we change habits and is key to the success of the debt snowball method.
The psychology of debt
The idea is to clear smaller debts over time, giving you a psychological boost that helps you maintain frugality while paying off debt.
There are lots of theories around the psychology of pleasure and reward. One theory is that splitting the reward into separate parts rather than having it all at once makes it more enjoyable.
It is also thought to make the feelings last longer.
That’s key to the debt snowball method.
Not only does it help clear debts and simplify your finances, but it also gives you psychological boosts every time you clear one.
Those boosts act as positive reinforcements that help strengthen your new behaviours of spending less and settling your debt.
As well as settling debts, you’re also changing your attitude towards money and spending.
The effects of those changes will last much longer than that feeling of being in debt!
As long as you move your payment on the next debt right away until everything it paid, this method can work.
According to finance expert Dave Ramsey, winning with money is 80% psychology and 20% knowledge.
I would have to agree and that’s why I like the snowball method.
Using the debt snowball method
You should have a pretty good idea of how the debt snowball method words by now.
In case you don’t, here’s a breakdown:
- Create a list of all your debts with the smallest to largest
- Pay the minimum of all debts and use all your spare cash towards paying off the smallest debt
- Once cleared, roll that payment up with all your spare change and begin paying the next smallest debt
- Rinse and repeat until you’re clear of debt
Like most things to do with debt and finance, it’s easy to write but harder to put into practice.
It is counterintuitive in ways, as you could be leaving higher interest debts to accrue more interest.
But, if you struggle with changing behaviours or the willpower to keep going, the snowball method can be very effective at cementing new attitudes towards money.
It won’t work for everyone, but it could work for anyone!
