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How to Use the Debt Snowball Method

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We’ve all heard this one: Numbers don’t lie.

And, probably, this one, too: You can make numbers tell any story you want.

Experience tells us both claims can be true (which is how poor old numbers get a bad rap). Remember all the fun we had with Kellyanne Conway’s “alternative facts”? Keep that in mind as we explore the conflicting realities of reducing your debt using the “snowball method.”

What Is the Debt Snowball Method?

The debt snowball method is a five-step approach to getting out of your financial hole — sorry for the mixed metaphor — popularized by nationally-syndicated radio talk show host Dave Ramsey. In Ramsey World, momentum – not math – is the key to eliminating debt.

Ramsey advises listing all your credit card and other unsecured debts in order of amount owed. While making certain you meet the minimum payments on all your accounts (automatic transfers from your bill-paying bank account inspire discipline), use whatever free cash you have to attack and pay off the smallest bill you owe.

Once that bill is zeroed out, move up the ladder one rung. Take the money you’ve freed up by eliminating the lowest debt, add it to the minimum payment you already were making on the second-lowest debt, and whittle that one down.

Your snowball has begun.

Ramsey stakes his formidable reputation on the notion that the key emotion linked to conquering debt is confidence. He believes wins on small debt build confidence and lead to wins against larger amounts.

As an alternative, its counterpart, debt avalanche, takes a strictly mathematical approach and — if you stick to it — will save money compared to the snowball.

Ramsey has plenty of support, and not just from the 13.25 million weekly listeners to his radio show. He also has backing from Blake McShane and David Gal, professors at Northwestern University’s prestigious Kellogg Business School, who studied the issue and published their findings in the Journal of Marketing Research.

“We found empirical support that psychological factors can be helpful (in paying off debt),” McShane said. “Paying off a small balance – a quick win – can make you feel good about yourself.”

Lots of personal finance advisors are fans of the snowball method, among them Jerremy Newsome, the Nashville-based CEO of Real Life Trading.

“If you would take [the debt snowball] approach,” Newsome says, “I actually think that every single person here could pay off all their credit card debt within three or four years.”

How the Debt Snowball Works

As explained above, the debt snowball method involves radically changing your behavior. For openers, to follow the debt snowball properly, you also should commit to the Dave Ramsey budget.

In exchange for adopting a fresh approach to budgeting and committing to getting unsecured debt paid off, you gain confidence about mastering your finances and optimism about your future.

Here is a summary of how Ramsey’s five-step debt snowball method should work:

  • Step 1: List all debts (except your home) in one column from smallest to the largest.
  • Step 2: Start a second column that lists the minimum monthly payment due on each debt.
  • Step 3: Pay the minimum due on each debt every month and add $100 a month (more, if you have it) to paying off the smallest debt.
  • Step 4: When the smallest debt has reached zero, add that monthly amount to the minimum payment you were paying on the second smallest debt; continue paying the minimum on the rest.
  • Step 5: When you finish paying off the second debt, repeat that formula – amount dedicated to paying off smallest debt + minimum payment due = total monthly payment – until all debts have been cleared.

How Effective Is the Debt Snowball Method?

Going by raw numbers alone, the math says the debt snowball method takes longer and costs more than other debt relief options, such as a debt consolidation loan or debt management program.

However, if you put the right numbers in the right categories for the right amount of time – and let momentum do its thing – you can make the numbers tell the story that the debt snowball method works just as well as a loan or debt management program.

So which side of the story should you believe?

Answer: both!

The truth about the debt snowball method is it’s a motivational program that can work at eliminating debt, but it’s going to cost you more money and time – sometimes a lot more money and a lot more time – than other debt relief options. It’s all about what works for you.

Consumers who would benefit from a neutral expert to provide a bit of outside coaching about their choices should contact a nonprofit debt counseling agency.

How the Debt Snowball Costs Money

When in doubt, refer to Claim No. 1: Numbers don’t lie.

Examined strictly from a math standpoint, there are alternative formulas for wiping out debt that work faster and cost less money than the debt snowball method.

Not even Ramsey argues otherwise. Here are two practical solutions that would be both faster and cost less money.

  1. Start by paying off the debt with the highest interest rate until it’s eliminated, then move on to the one with the next highest interest rate, pay it off and repeat until all debts are eliminated.
  2. Find a solution that offers a lower interest rate and monthly payments that you can afford.

The reasoning behind Solution No. 1 isn’t difficult: Unless it’s the debt with the smallest balance — putting it first on your list — the longer a debt with the highest interest rate is allowed to fester, the higher the total will be when you finally get around to it. Instead, attack it immediately.

Solution No. 2 is the recipe for a debt consolidation loan or debt management program. Both are effective, but only if they reduce your monthly payment by lowering the interest rate you pay on your debt.

Snowball Method Example for $22,500 of Debt

The example of the debt snowball method offered on the Ramsey website is for paying off $22,500 spread over four debts. Our sample keeps the same amount and spreads it over four credit cards with suggested interest rates applied to each card.

  • Credit Card No. 1 has $500 in debt at 12% interest.
  • Credit Card No. 2 has $1,000 at 15%.
  • Credit Card No. 3 has $6,000 at 24%.
  • Credit Card No. 4 has $15,000 at 16%.

Here is how the debt snowball method plays out using Ramsey’s suggested starting points for each card. The recommended total payment every month comes to $565. Here’s the payoff schedule:

  • Credit Card No. 1 hits zero in five months.
  • Credit Card No. 2 hits zero in 12 months
  • Credit Card No. 3 hits zero in 42 months.
  • Credit Card No. 4 hits zero in 65 months.

The total amount paid would be $36,191.13 spread over 65 months, or nearly 5 1/2 years.

Debt Snowball Alternatives

We noted alternatives to the debt snowball method above: attacking debts in order of interest rates, highest to lowest (debt avalanche); debt consolidation with a lower-interest loan; a debt management program.

Getting out of debt is serious business, and there are mistakes to avoid when you make that commitment. Deciding which method works for you involves assorted considerations, among them:

  • How much debt you have
  • What type of debt it is
  • What condition your accounts are in: Are they current, or have you fallen behind
  • What sort of consolidation loan your credit score will allow you to qualify for

Debt Avalanche Method vs. Debt Snowball

The debt avalanche is similar to the debt snowball in that it lines accounts up in a prescribed order. The difference is, in the debt avalanche, consumers attack the debt commanding the highest interest rate first, pay it off, and, again, using money freed up, work their way down.

Unless your highest-interest debt is also your smallest, the debt avalanche may not be as immediately rewarding. However, by knocking off those balances that are the most expensive to carry, over time, you should pay less. And that’s a good thing.

Again, an expert at a nonprofit credit counseling agency can help you work out the math.

Debt Consolidation vs. Debt Snowball

Debt consolidation is not a one-size-fits-all proposition. The best way to consolidate debt for you may be different for your cousin or next-door neighbor.

The time-honored tradition for debt consolidation is by using a personal loan and using it to pay off all credit card debt. Personal loans typically have a five-year payoff period at a fixed-interest rate. If the borrower got the loan at 18% APR, the monthly payments would be $571.35, or about $6 a month more than the snowball method.

However, the debt would be paid off in five fewer months at a total cost of $34,281.13 — a savings of $1,910.

Even with the Federal Reserve hiking rates, consumers with high credit scores may be able to find debt consolidation loans at rates significantly lower than 18%.

A second alternative — one that can, in fact, be used in combination with a personal loan — is through balance transfer credit cards. Customarily, balance transfer cards offer extremely low (even zero) introductory rates for a period of months (usually 12-18, but could be up to 24).

Use two or three balance transfer cards to consolidate a large chunk of your debt, and put the rest on a personal loan. Be wary of the APR that kicks in at the end of the introductory period.

And, for heaven’s sake, do not go on a spending binge simply because you have zero balances on your old cards.

Debt Management vs. Debt Snowball

A debt management program involves credit counselors working with card companies to reduce the interest rates on the debt owed and arranging a monthly payment schedule the consumer can afford. There also is a monthly client fee involved in DMPs.

The projected new interest rates in our example (using a debt management program) are:

  • Credit Card No. 1, 8%.
  • Credit Card No. 2, 12%.
  • Credit Card No. 3, 10%.
  • Credit Card No. 4, 8%.

Under the debt management plan described here, the monthly payment — including fee — would be $514 per month, with the debt eliminated 60 months. The total amount paid — including the fee — would be $30,757.75.

We’ll do the arithmetic for you. In our working example, the best debt management companies can save you $5,433.38 over the debt snowball method, and as much as $3,523.38 less than what would be paid through a debt consolidation loan.

Bottom Line? Commit to Paying off Debt

Given the number of followers Ramsey has – some might call them devotees – it’s difficult to argue that his debt snowball method isn’t worth considering if you are financially overwhelmed.

Boston University professor Remi Trudel studied 6,000 credit card holders and fully supports the snowball method and its effectiveness.

“Our research shows that consumers will get out of debt quicker paying down accounts one at a time starting with the smallest,” Trudel said. “Allocating the most money to the smallest account was particularly effective. Doing so increased consumer’s motivation to repay debt in the next period and increased progress toward the goal of becoming debt free.”

So, if you are the sort of person who benefits from encouragement, the debt snowball method could be the right fit.

However, be aware that waiting to pay off high-interest debt likely will cost you thousands of dollars and increase the amount of time you spend in debt.

In the end, the only inarguable point about paying off debt is that you must be committed to the process. It’s likely you didn’t fall into debt overnight and it’s even more likely you won’t get out of debt overnight.

The key is having a plan and sticking to it. Not so long ago, National Bureau of Economic Researchers in England discovered alarmingly ineffective behavior among consumers that seemed to boil down to pure randomness, driven only by the size of their credit card balances. Sound familiar?

It’s human nature: We shrink from pain, and high balances are pain, indeed. For those who need guidance, insight, advice, and maybe a little tough love, credit counseling is a splendid way to get on track to pay down debt.

No matter how you work the numbers, it takes time and commitment to get there. But the destination is surely worth the journey.

About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].


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