If there is one thing extremely valuable that I have learned when it comes to personal finance is that not everything will work for everyone. That applies to paying off debt as well.

As of June 2017, the total collective American revolving credit card debt surpassed the previous high of $1.02 trillion set in April 2008. We’re now sitting at $1.021 trillion in debt as a country.

That’s right. We’re now carrying more debt as Americans than we were at the height of the Great Recession.

For balance-carrying households, the average credit card balance is $16,048 per household. That debt is strictly plastic. That means it excludes mortgages or even school or car loans when determining that number. Credit cards tend to have much higher interest rates than a car loan or school loan, which makes that amount even worse.

In effect, we are actually paying much higher for the items we’ve purchased than the actual retail price. For lower balances, it isn’t much more but when you get higher and closer to that $15,000 mark on your credit cards, you will be paying the bank a ton of needless extra money to finance your purchases.

So it’s clear we need to get rid of debt. There are many ways to do that, but what if you don’t have a lot of money to throw at your debt, or you have quite the amount to pay off? That’s where the Debt Snowball Method comes in.

Debt Snowball Method

Now, let me be clear by saying this is not the only method to paying off debt, but it is a good one.

The idea of the Debt Snowball Method is to start with your smallest debt amount and put everything extra you have toward it while paying minimum payments on all your other debts.

You’re starting with your lowest because you’ll be able to pay off that one the quickest. This motivates you to keep going because you are able to have some quick victories in paying off your debt.

Let’s look at an example

John (Smith?) has $9,000 in credit card debt spread out between 4 different cards. The largest card (Card 1) has $3,400 on it, the second largest (Card 2) has $2,500 on it, the third largest (Card 3) has $2,300, and the smallest (Card 4) has $800. The minimum monthly payments are $60, $45, $40, and $25 respectively. That’s a total of $170 per month spent just on credit cards.

Remember, the idea is to pay off the smallest debt first and then “snowball” that monthly payment amount into the next smallest debt. We won’t be paying attention to interest rates at all. The only thing interest rates will affect is how long it takes to pay off the amount. Obviously, the higher the interest rate the longer it will take because the bank is adding a little bit each month in interest.

Now, John has an extra $100 each month in surplus to throw at his credit card debt. With that extra money, he is going to start with the $800 credit card and work his way up from there.

Every month John puts $125 (the $25 minimum plus the $100 extra) toward the $800 balance, paying it off in 6 to 7 months, depending on how high the interest rate is.

Now, if the final month’s payment is not $125 dollars, John can put whatever is left over from that payment and start “snowballing.” In essence, John always wants to be putting $270 a month toward his credit card debt. We get that number by adding the minimum payments plus the extra $100 John is putting toward his debt:

  • Card 1: $60
  • Card 2: $45
  • Card 3: $40
  • Card 4: $25
  • Extra Amount: $100
  • Total Amount of payments: $270

Still with me? Sweeeeeet!

The Snowball

Now, since he’s paid off his card with $800 on it, he has one less credit card to worry about. The $25 minimum payment will now be snowballed with the extra $100 dollars toward paying off Card 3. This makes each month’s payment $165 until it is paid off, the $40 minimum, plus the $100 extra, the $25 minimum that was for Card 4.

Rinse and repeat!

As soon as Card 3 is paid off you add its minimum payment to the snowball and start gunning for Card 2 until that one is paid off, so on and so forth. Using this method it will take him between 3 and 4 years to completely get rid of his credit card debt. Not bad!!

Some Considerations

The main reason the Debt Snowball Method works well is because of the psychological factor of paying off a credit card completely. Even small wins are great motivation!

There are a few things to consider first, though. Here’s what I recommend.

A Small Emergency Fund

It is important, like Dave Ramsey and other financial experts say, to get some sort of small emergency fund in the bank before working on paying down your debt. That way if you are paying down your debt and have an emergency you won’t have to add to your debt to take care of it.

I recommend $1,000 in the bank before paying off debt, but it’s important to go with what makes you feel comfortable. If you need to have a little bit more to feel comfortable putting all of your extra money toward debt, then, by all means, do it.

This May Not Work for You

As I said before, not everything works for or is the best for, everyone. It’s important to keep that in mind.

If by some chance you get a new job or a raise or something and are all of a sudden making double what you make now, re-examine your debt payoff strategy and determine if you still need the psychological impact of paying off a debt smallest to large and should start looking at a more economical way of paying off your debt, such as the highest interest or highest monthly payment first.

You May Not Have ANY Extra Money

This method works even if you don’t have much extra money. However, you may be thinking “Well, Tim, I have NO extra money to put toward debt.” Fear not! It may take a little bit longer but keep paying off the minimum payments, and as soon as that lowest balanced card is paid off, start your snowball! The key is to stay motivated until it is paid off. You can do it!

Snowball Away!

The Debt Snowball Method is one of the best ways to pay off debt just for its “victory” factor alone. For those with little to no extra money to put toward their debt each month, it may be the absolute BEST way.

It is designed to motivate you to keep going and help you achieve financial freedom.

Think about it this way. Paying the minimum payments in our example, if you started with the highest balance, you would have it paid off in 57 months, not counting any interest that would raise the balance. That’s 4 years and 9 months of paying that debt down!

The debt snowball method can cut that down significantly while giving you that “I just paid off a credit card” high.

Again, the math encourages you to toward paying attention to interest rates and all but the psychological factor cannot be ignored as an effective motivator for continued debt reduction success.

The Debt Snowball is powerful enough to be used no matter what method you’re using to pay off debt. Since you’re used to the money coming out for your cards anyway, snowball that payment into the next one. You’ll have your debt paid off before you know it!

Have you had any success with snowballing your debt? I know I have!

Share your experience in the comments below!

Note: I found a debt reduction calculator that is free of charge for personal use from Vertex42. They specialize in making excel spreadsheets. I have started using it myself as it is an incredibly powerful spreadsheet. Enjoy!