Snowballing is a debt management strategy popularized by personal finance guru Dave Ramsey. He and other personal finance professionals like to discuss snowballing debt as a viable debt repayment strategy for those who are looking to get out of oppressive debt situations.
But what does it actually mean to snowball your debt? How does it work? And should you snowball your debt in order to get ahead financially? Let’s find out.
What Is Snowballing Debt?
Snowballing debt, also called the debt snowball method, is a way for people to pay down their loans even if they only have a certain amount of money to budget each month for debt repayment.
The way it works is that you pay down the smallest balance first, then work your way up to paying down larger balances. To start snowballing your debt, there are a few simple steps:
- List your debts in order of balance. Smallest to largest. Don’t worry about the interest rate! (Do not include mortgages.)
- Start making minimum payments on all of your debts, except the smallest one.
- Put as much money as you can budget toward your smallest debt. Pay every month until it is paid off.
- Repeat with the next smallest loan: paying the minimum on all other balances contributing as much money as you can to this balance.
The reason it works is because as you pay off each item, you can allocate the money that you were using toward paying off the last piece of debt. As a result, when you go to your final large debt, you’re able to allocate a lot more money to paying it off.
How You Should Snowball Debt
Don’t start snowballing your debt until you have a stable financial situation with a $1,000 emergency fund. It’s more important for you to have cash ready in case of catastrophe than it is for you to pay back debt that you can pay the minimum on.
Aim to increase your available income. Getting a second job, starting a side hustle, and cutting unnecessary spending are all excellent ways to find more money to allocate toward debt repayment.
Leave out your mortgage, as you end up refinancing it every several years anyway. Instead, focus on credit card, medical, car loans, student loans, and other personal loans you may have.
If you can’t pay all your minimums, look into refinancing and consolidation to try and reduce your payments and overall debt burden. However, make sure you do the math: refinancing and consolidation could end up costing you money.
When Snowballing Debt Becomes Impossible
If you’re in far too much debt and are unable to cover the minimum payments, then this method for repaying debt becomes impossible. You must be able to make at least the minimum payments for this to work. It must also be mentioned that you should have a predictable income, otherwise you will not be able to use this method for paying down debt.
Many people choose bankruptcy in this situation. However, in many cases, you can get your debt reduced by negotiating with the lender.
Don’t spend time worrying about your debt: instead, make a plan to tackle it. Start by reducing your overall debt burden if possible. We wrote an article about debt consolidation and how it might be able to help you. Then, negotiate with lenders to see if you can start paying your debt with lower payments.