How a debt snowball works

December 02, 2019

If your goal is to pay off debt faster, there are different methods you can use. One of these is using a debt snowball. Keep reading to learn how a debt snowball works and what its pros and cons are.

Get started by making a list of your debts, arranging them from lowest to highest amount owed (ignore their interest rates). Next, find out if you have extra money, and how much, in your budget to put toward extra payments on debt each month. If you've already worked out a budget, you're one step ahead - if not, subtract all of your monthly expenses (mortgage/rent, utility bills, car insurance, etc.) from your monthly income(s). Then, take any amount left over and plan to pay that toward the lowest amount of debt on your list. Keep paying the minimums on all other debts.

Once you've paid off the lowest debt, take the amount you were paying on it and apply it toward the next debt on your list. As you free yourself of the smaller debt payments, you can roll those former payments together to take out the larger ones.

What are the advantages? Using the debt snowball can be good motivation to budget better and pay off debt faster. You get to cross off debts, one by one, and gain momentum. You feel like you're making progress and are rewarded every time you can erase an amount owed off your list. It can also help you focus on one debt at a time instead of feeling overwhelmed.

Why wouldn't you want to use a debt snowball? If you found that you had some extra money every month, you might not want to put all of it toward your debt. That would mean no cushion to fall back on if surprise expenses came up. It's also argued that you could save more money by paying off the highest interest balances first.

For more on this subject, read:
- What is Debt Snowballing
- Debt Snowballing
- Debt Snowball Calculator