- Personal Finance»
- Debt & Bankruptcy
The Debt Snowball Method: How It Works
The "debt snowball" method was brought to life by personal finance expert, Dave Ramsey, as a means of encouraging debt-ridden individuals to be inspired to tackle their debts rather than burying their head in the sand because the task looks too daunting. If you're not already familiar with the concept of the "debt snowball" method, here's what you need to know about it.
There are two differing strands to the "debt snowball" plan. If you're following the plan advocated by Dave Ramsey, the idea is that you tackle the smallest debt first and get this one paid off first to give you some momentum to take forward into breaking down larger debts.
This goes against the common belief that you should single out the debts with the largest interest rates to cut how much interest you'll ultimately pay. This "debt snowball" approach is supported by the Motley Fool.
While you're busy tackling one particular debt, you still need to meet the minimum payments on your other debts. Once you've successfully paid off a debt, you can take the minimum payments from that and add this to what you're paying on your prioritized debt to get it paid off quicker. The idea is that you're never decreasing your debt payments, despite the fact that debts are being paid off, so that you're getting the whole lot paid off in the shortest time frame.
If you're not sure how the "debt snowball" plan would work for your debt situation, you can plug your particular numbers into the "snowball calculator" to get a better idea.
Tackling the smaller debts first gives a sense of achievement and this can spur you on. Dealing with bigger debts may sound more sensible on paper, but many people lose interest and enthusiasm if they can't see any real progress being made and this can mean that it isn't so beneficial in the long run. Putting all of your effort into paying off one debt at a time means that you'll see definite progress as each debt is whittled down and eventually paid off altogether.
If you prefer to tackle higher interest debts first, you can significantly cut how much interest you'll be paying over the life of the debt and this can mean that there isn't going to be massive interest piled on top of the debt to prolong it.
Assuming that your smaller debts aren't also the ones with the highest interest, your other debts will be racking up interest while you're concentrating your efforts elsewhere so this is something to think about if you follow Dave Ramsey's take on the plan.