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How to Start and Manage a Debt Snowball

Since it’s a new year and more people are resolving to get out of debt, I think it’s about time for a refresher on the debt snowball. Debt snowballs are popularized by Dave Ramsey and a number of other financial gurus as a great way to manage your debt repayment and get out of debt faster. I’m going to walk you through how you’d go about setting up your debt snowball.

Bring Out Your Debt

Before you can optimize your debt repayment, you have to know what you owe whom and at what interest rate. You don’t need any fancy equipment for this, just collect the following information for each debt:

  1. Amount still owed:
  2. Minimum payment:
  3. Interest rate:

For example:

  1. Amount still owed: $900
  2. Minimum payment: $20/month
  3. Interest rate: 8.25%

If you only have one debt you’re trying to pay off, skip down to the section on snowflaking.

Otherwise, line up your debts.

Getting Your Debts in Order

How should you order your debts? This is the part where gurus disagree.

Dave Ramsey is in favor of putting your smallest amount owed first. He believes that this will give more people more of a boost more of the time. Because you’ll get your smallest debt paid off faster, you’ll want to keep going with it.

That approach may be right for some people. I’m more motivated by numbers, so it’s right for me to put them in order of interest. Highest interest at the top and lowest interest at the bottom. Do whichever you think will feel the best for you. Your biggest goal here is to stick with it.

So your debts may look something like this (and these are random numbers just picked for the example):

In order by interest rate

Debt Remaining    Min. Payment   Interest Rate
Debt A   $1920 $100/month   24.99%
Debt B $2948 $85/month   15%
Debt C $500 $30/month   11%
Debt D $7,349 $150/month   8%

Creating the Snowball

You’ve seen what happens if you roll a snowball down a hill. Little bits of snow stick to it and it gets bigger as it goes. A debt snowball is essentially the same.

To get to this stage, you have to be able to actually make the minimum payments every month. If you can’t, talk to creditors about decreasing minimums or explore other options for earning more. Getting into all that in this article would make it too long.

Ideally, you’ll also be able to find other money to put toward your debt. Again ideally, you’ll have a certain set amount each month. But you don’t have to, you can use the debt snowflaking method and stick on whatever you’ve got available.

The initial snowball

You continue to make minimum payments on all the debts. Then you add your extra debt repayment money to the first debt on the list. You continue to do that until the debt is paid off (you can see why Ramsey feels the smallest debt should go first, since you could probably pay off $500 faster than $1900).

The snowball gains momentum

Once you’ve paid off your first debt, you add all the money that you were paying on it towards the next debt on the list. Suppose that you were able to find an extra $200/month to put toward Debt A, so you’re paying $300/month total on it. That whole $300/month would then add onto the $85/month you were paying toward Debt B.

The super-powered snowball

Then you’d add the $385/month to the Debt C payment and finally the $415/month to the Debt D payment. With $385 in a month, you could pay off Debt C in less than 2 months, probably in 1 with plenty left over for Debt D, given that you’d have been making minimum payments for a while before you got there.

And if you pay off a smaller debt before your highest-interest debt simply by meeting the minimums, then throw that in as well!

Adding Snowflakes to Your Snowball

For some people, it’s hard to say that you’ll have an extra $200 each month to put toward your debt snowball. In that case, paying all your debts at their minimums at first (though once you pay off one, you can add its monthly payment to the next debt) isn’t a bad thing. You’re still set up for the snowball effect once one of your debts is paid off.

But you can also look into “debt snowflaking,” the idea of putting whatever extra money you have in a month toward your snowball.

For example, our extra debt-repayment money comes from Micah’s stipend. So we can depend on a certain amount every month. But now that I’m employed full-time, we can add my blogging money to that. It’s different every month, so it’s more of a snowflake than a committed part of the snowball.

Or if you don’t see ways to earn extra money, look for places you can save. Paid Twice started using the extra money she’d budgeted for the month to pay off her debt. Little things like $5 left over in the grocery budget and $10 in gas can add up.

Even if the number doesn’t look impressive, don’t give up and not snowflake it. Little bits of money add up over time. And as you keep going, you’ll be helped along by your own momentum and eventually by paying off one of the debts (which is what’ll really get the snowball rolling)!

Manage Your Debt

Don’t live in fear of your debt. You can take control, you can even pay it off faster. Whatever you’ve got to work with, whether it’s no extra money, $15/month, or $1000/month, you can start a debt snowball rolling and watch it roll to freedom.

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{ 10 comments… read them below or add one }

Lin Burress @Telling It Like It Is January 5, 2009 at 8:43 am

I really like your explanation of the debt snowball concept. Even though the well-known financial guru’s don’t seem to agree on everything regarding debt reduction and/or managing debt/money, we’ve been utilizing goal setting software for awhile now and have found it to be very helpful and simple to use.

Having read numerous money management books from the various “guru’s”, along with their sometimes confusing plan of attack and complicated worksheets that make no sense at all, we feel very fortunate to have found the simple, easy to use software that makes paying off debt more like a game. A game we’ll win for sure.

Credit Counselor January 5, 2009 at 9:52 am

I really liked the plan outlined to tackle debt. If you find yourself in knee deep debt then consolidating your debts and replacing the numerous payments into a single payment may work out to get you out of debt. There are many credit counseling agencies to guide you and help you pay off your debts with a debt management plan.

However make sure that the credit counseling agency is certified and listed with the BBB of your region before you enroll into any such program

Craig January 5, 2009 at 4:21 pm

Good advice. The most important thing is getting a plan and being structured. This will help you map out how to attack the issue and figure out how to help begin eliminating debt. Because you do not want to get into a debt snowball.

mrsmicah January 5, 2009 at 6:46 pm

@Lin, I was reading one book where the author had this whole thing involving taking your gross salary, account for taxes, whatnot, it was more than my poor little brain could handle at first and I’m used to reading about this stuff. After reading the chapter 3 or 4 times, I finally understood all the steps she wanted me to take. But frankly, it was a ridiculous amount of effort that could have been avoided if she’d just used different numbers and take-home pay.

@Credit Counselor

There are a lot of good groups out there, but as you say you also have to check up on them. There are plenty of wolves among the sheep.

@Craig, I’ve found structure critical to getting things done. Throwing extra money at a debt from time to time isn’t bad, but it won’t get the debt paid off quickly or efficiently.

Frugal Trenches January 6, 2009 at 12:22 pm

Absolutely fabulous post!

Dawn January 6, 2009 at 12:33 pm

I’ve been living under the “from pennies, dollars are made” rule for awhile now. Each month I work to come up with $900. It can be done – and with just a few dollars here and a few there. Snowflaking can work if people put their minds to it. It is easy to say that $5 won’t make a difference, but it does.

Jim @ Change Jar Savings January 7, 2009 at 8:43 am

I have tried both ways of organizing debt, by interest rate and by lowest to highest balance. It is a personal preference. If you keep your eye on the total dollar amount going down it does not matter which way you pay the debt down.

Personally, I like the lowest to highest balance method. While I may pay a little more interest, I see not only the total amount of debt going down but also the number of creditors.

My problem with the highest interest/pay minimum balances is that some creditors like doctors and hospitals do not charge interest and have no minimum required on their bills. After talking to them, they usually want a third each month for three months. But it always throws the debt repayment plan out of step when you have chronic condition that needs treatment. You pay tem off and add it right back, a circle of debt. I cannot wait till I am done paying off credit cards and only have to worry about my wife’s medical bills.

mppaul2 January 9, 2009 at 3:09 pm

The frustrating thing is that some if not all cc only allow so many payments to be made within a billing cycle. So if you are trying to make 2-3 payments a billing cycle to help the balance go down and thus reduce the interest, you could find your self limited. What a goofy greedy system…well I gues everyone wants to make money and consumers did sign up for the terms.

Jerry January 14, 2009 at 11:34 am

To mppaul2: Why make 2-3 payments per month? You do not have to pay your credit cards with your extra saved money each time you save the money. Save the money yourself, then pay all at once as soon as you get your bill.

Katie March 29, 2012 at 12:55 am

On a debt management plan we renegotiate your monthly unsecured debt payments down to a level you can afford

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