There are more methods for paying off debt than I could list in a single article, but my personal favorite and the one I recommend the most is the “Debt Snowball”. The best way to manage debt is to avoid it entirely, but if you’re like almost 80% of Americans, you’re already in it pretty deep and trying to figure a way out. Recessions and inflation really magnify this problem, there are more searches for “debt management”, “debt elimination” and “get out of debt” than I’ve seen since the 2002 recession.
Get that snowball rolling down the hill! I know that sounds silly now, but just keep reading. I’ve seen people that have struggled with their debt for years turn their lives around pretty quickly with this method. Before we dive into the details let me tell you what makes this approach different and more powerful than other methods you may have tried in the past.
The Debt Snowball provides rewards along the way, and these rewards encourage you to continue paying off your debt. The other major benefit of this approach is that it instills good money management and saving habits without you even realizing it. By the time your debt is gone, you’ll be a disciplined wealth-building machine.
Here’s how it works. First, create a list of all of your debts. A table similar to the following is all you’ll need…
| Creditor | Balance | Minimum Payment | Rate |
| Macy’s Card | $160 | $40 | 21% |
| Bank of America Card | $415 | $27 | 12% |
| Nieman Marcus | $1,800 | $180 | 21% |
| American Express | $2,475 | $99 | 18% |
| Chase Credit Card | $3,012 | $121 | 10% |
| Rooms-To-Go Finance | $5,995 | $125 | 0% |
| Car Loan | $11,050 | $307 | 8% |
| Student Loan | $16,259 | $135 | 5% |
| Pay Extra if you can | $100 | ||
| TOTAL | $41,166 | $1,134 |
Notice that these are sorted in ascending order by the amount owed with the smallest balance first and the biggest balance last. Why? Because that’s the order you’ll be paying off your debt, that’s how the snowball works. Paying off the small debts first gets the snowball rolling down the hill. We’re not going to worry about the rate or the minimum payment, we’re just going to focus on balances. I also added a row where we could list how much extra you can afford to pay each month in the “Pay extra if you can row”, $100 in this example.
To get your snowball rolling, you want to pay the minimum payment on every debt except the smallest. That’s right, it might sound like blasphemy based on all of the debt elimination methods you’ve tried in the past but I’ll say it again, just pay the minimum on every balance except the smallest. On your smallest debt, Macy’s in our example, you will pay the minimum plus whatever extra you can afford.
You must also STOP BORROWING for this to work. Until you’ve made substantial progress, no more loans and no more financing. Pay cash or use your debit card if the inconvenience of cash annoys you, but don’t borrow or charge ANYTHING.
Back to our example. The first month we are going to pay the minimum payment of $40 for Macy’s plus the extra $100 that we can afford. We will pay the minimum payment on everything else.
Fast forward two months…
| Creditor | Balance | Minimum Payment | Rate |
| Macy’s Card | PAID | $40 | 21% |
| Bank of America Card | $252 | $27 | 12% |
| Nieman Marcus | $1,500 | $180 | 21% |
| American Express | $2,350 | $99 | 18% |
| Chase Credit Card | $2,819 | $121 | 10% |
| Rooms-To-Go Finance | $5,745 | $125 | 0% |
| Car Loan | $10,582 | $307 | 8% |
| Student Loan | $16,124 | $135 | 5% |
| Pay Extra if you can | $100 | ||
| Payments per Month | $39,373 | $1,134 |
Two months later and we’ve already eliminated the Macy’s card, a great start. So now that Macy’s is paid, what do we do with that $40 minimum payment? We packed it back on to our snowball so that it can get bigger as it rolls down the hill. My metaphors are usually pretty weak, what I’m literally saying is that we took the $100 extra and the $40 minimum Macy’s payment and started applying it to the Bank of America card which is why you already see a much smaller balance.
Let’s fast forward two months again…
| Creditor | Balance | Minimum Payment | Rate |
| Macy’s Card | PAID | $40 | 21% |
| Bank of America Card | PAID | $27 | 12% |
| Nieman Marcus | $1,111 | $180 | 21% |
| American Express | $2,222 | $99 | 18% |
| Chase Credit Card | $2,624 | $121 | 10% |
| Rooms-To-Go Finance | $5,495 | $125 | 0% |
| Car Loan | $10,107 | $307 | 8% |
| Student Loan | $15,988 | $135 | 5% |
| Pay Extra if you can | $100 | ||
| Payments per Month | $37,547 | $1,134 |
Now the Bank of America Card is paid! How could it be paid off so fast? We paid the minimum $27 payment plus we applied all of our extra money. Extra money? We are still paying $1,134 in payments each month, that total “Payments per Month” amount is never going to change. When a debt gets paid off, we simply add its payment to the next smallest balance and we keep doing this until everything is paid off.
Paying off these smaller debts is like taking baby steps, it’s a great reward and it doesn’t take very long plus it reinforces the behavior. Can’t you see yourself being pumped after you closed out that Macy’s card and then even more excited when you paid off Bank of America only two months later? Wouldn’t that give you motivation to continue? For many people, the answer is yes, they can see real and fast progress.
Let’s fast forward six months this time…
| Creditor | Balance | Minimum Payment | Rate |
| Macy’s Card | PAID | $40 | 21% |
| Bank of America Card | PAID | $27 | 12% |
| Nieman Marcus | PAID | $180 | 21% |
| American Express | $870 | $99 | 18% |
| Chase Credit Card | $2,016 | $121 | 10% |
| Rooms-To-Go Finance | $4,745 | $125 | 0% |
| Car Loan | $8,645 | $307 | 8% |
| Student Loan | $15,574 | $135 | 5% |
| Pay Extra if you can | $100 | ||
| Payments per Month | $31,850 | $1,134 |
Another debt paid off, Nieman Marcus is gone! We are now applying $446 per month to the American Express bill so it is disappearing quickly (the $100 extra + $40 Macy’s payment + $27 Bank of America payment + $180 Nieman Marcus Payment + $99 minimum American Express Payment).
Usually after this many months, paying the $1,134 no longer seems like a burden, it starts to feel like a reward and a victory. You can really see yourself chipping away at that mountain of debt because you are starting to make BIG payments on your smallest balance.
Let’s jump ahead another 6 months…
| Creditor | Balance | Minimum Payment | Rate |
| Macy’s Card | PAID | $40 | 21% |
| Bank of America Card | PAID | $27 | 12% |
| Nieman Marcus | PAID | $180 | 21% |
| American Express | PAID | $99 | 18% |
| Chase Credit Card | PAID | $121 | 10% |
| Rooms-To-Go Finance | $3,684 | $125 | 0% |
| Car Loan | $7,124 | $307 | 8% |
| Student Loan | $15,149 | $135 | 5% |
| Pay Extra if you can | $100 | ||
| Payments per Month | $25,957 | $1,134 |
Great progress, we paid out the Chase AND the American Express. At this point, only the biggest ugliest debts are left, all the small stuff is gone. Since we continue to pay $1,134 per month even though a lot of our debt is gone, our snowball is starting to turn into an avalanche. This will allow us to take out those big balances quickly, we can apply $592 per month to our Rooms-to-Go account.
We’re going to jump ahead another six months, and this time, pay particular attention to how much debt is disappearing…
| Creditor | Balance | Minimum Payment | Rate |
| Macy’s Card | PAID | $40 | 21% |
| Bank of America Card | PAID | $27 | 12% |
| Nieman Marcus | PAID | $180 | 21% |
| American Express | PAID | $99 | 18% |
| Chase Credit Card | PAID | $121 | 10% |
| Rooms-To-Go Finance | PAID | $125 | 0% |
| Car Loan | $5,198 | $307 | 8% |
| Student Loan | $14,713 | $135 | 5% |
| Pay Extra if you can | $100 | ||
| Payments per Month | $19,911 | $1,134 |
See how fast you can pay off even large loans when you use this method? You’re still paying $1,134 per month, but with all of your small debts gone, $692 per month was going to Rooms-to-Go. After Rooms-to-Go was paid for you were able to start paying $999 toward your car payment per month and still pay the minimum payment on the student loan!
This time we’re going to fast forward an entire year, mostly because I’m tired of doing the calculations…
| Creditor | Balance | Minimum Payment | Rate |
| Macy’s Card | PAID | $40 | 21% |
| Bank of America Card | PAID | $27 | 12% |
| Nieman Marcus | PAID | $180 | 21% |
| American Express | PAID | $99 | 18% |
| Chase Credit Card | PAID | $121 | 10% |
| Rooms-To-Go Finance | PAID | $125 | 0% |
| Car Loan | PAID | $307 | 8% |
| Student Loan | $7,046 | $135 | 5% |
| Pay Extra if you can | $100 | ||
| Payments per Month | $7,046 | $1,134 |
All of your debts are gone except for a $7,046 student loan balance and it took less than three years. You’ve erased $34,120 of debt. Seven months from now, even that student loan will be paid off since you’re still paying $1,134 per month.
In addition to getting out of debt, you will have gained something very valuable along the way, the habit of saving. You may be thinking “The habit of saving?! All I’ve only been doing is paying off debt, I haven’t saved a dime!”
That’s the beauty of the Snowball Approach, you continued to pay $1,134 per month even though debts were disappearing. You could have taken that extra money and spent it, but instead, you chose to live beneath your means and apply the extra money to debt. When all of your debt is gone, what will you do with that $1,134 per month? That’s right, save it! It will be easy, it won’t even feel like saving because you’re already in the habit and you won’t miss the money because you haven’t had access to it in three years.
I’m a firm believer in long-term goals so let’s skip ahead to the happy ending. Say you decide to save that $1,134 every month since you’re already used to living without it. What will you have after 10 years if you save $1,134 per month in a tax deferred 401k and get the S&P average return of 10.75%? $242,539. How about after 20 years? $949,784. What if your employer offers a $3,000 401k match during that 20 years? $1,159,172.
Enough reading, get to it, go make your list and throw your first Snowball!
Best of luck and please add your thoughts to this post, we’ll all benefit from your questions and insights.
