What Is a Debt Snowball?

If you live in the tropics and have never known the joy of a good winter romp, the meaning of the personal finance metaphor “debt snowball” may be a bit of a head-scratcher. So let’s break it down.

When building a snowball, you start with a small sphere of snow and roll it along a snowy surface until its mass grows. When using the debt snowball strategy, you build similar momentum by paying off your smallest debts first and then working your way through the larger balances.

Each debt you plow through frees up more of your money, and the amount you can allocate to repaying your priority debt grows and grows. 

For many, the snowball is a confidence-boosting, manageable approach to becoming debt-free. But it’s not the most cost-effective strategy, and it may not be the right tactic for laser-focused debt slayers.

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What Is a Debt Snowball?

The debt snowball is a strategy in which you make minimum payments and allocate extra cash toward paying your smallest debt in full. After repaying that debt, you then shift focus toward repaying the next-smallest balance until all your debts are eventually repaid.

How Does the Debt Snowball Work?

Part of what makes the debt snowball method appealing is its simplicity. All it takes is some budgeting, a spreadsheet, and a bit of maintenance.

Step 1: Make a budget

If you haven’t put together a monthly budget already, now’s the perfect time to start.

Add up your projected monthly expenses:

• Needs (food, housing, emergency fund contributions, etc.)
• Wants (some fun stuff)
• Minimums (the amounts you’re required to pay toward each of your debts)

Subtract that total from your income, and voilà! The difference can be allocated toward aggressively repaying your debt.

Once you have that number, it’s time to begin debt snowballing in earnest.

Step 2: Create a debt snowball spreadsheet

Start with a new spreadsheet. List each separate debt you have as its own row. Add columns for the “remaining balance” and “minimum monthly payment,” as well as a column for “extra payment.”

Once all your debts are on the sheet, organize them in ascending order from the smallest to the largest balance. 

Here’s a basic debt snowball example, with a table filled out for the first month:

Debt source	Remaining balance	Minimum payment	Extra payment
Personal loan	$3,000	$262	$200
Credit card	$5,700	$152	N/A
Student loan	$18,500	$201	N/A
Auto loan	$22,000	$495	N/A

There are fancier templates around, but creating your own spreadsheet allows you to track only the stuff that’s important to you. Your time may be better spent on other pursuits, like trimming unnecessary expenses from your budget or putting some extra hours into your side hustle. 

Step 3: Make payments and update your data

Pay the minimum payment on all the debts except the first one you'll be paying off. Make your above-minimum payment toward the first debt on your list based on Step 1. Make only the minimum payments on the rest of your balances.

You’ll adjust the figures in your spreadsheet each month as your balances drop.

In this example, the personal loan will take a mere seven months to pay off. That’s the kind of quick confidence boost that most people need to stay committed to the process that might otherwise feel endless.

Step 4: Reprioritize 

Once you’ve taken care of the smallest balance on your list, you can shift focus toward paying off the next priority debt.

In this case, you’ll combine the $262 minimum payment you made toward your personal loan with the $152 minimum payment for your credit card, plus the $200 extra payment you’ve budgeted for each month. 

Your new spreadsheet looks like this:

Debt source	Remaining balance	Minimum payment	Extra payment
Personal loan	$0	$0	$0
Credit card	$5,700	$152	$462
Student loan	$18,500	$201	N/A
Auto loan	$22,000	$495	N/A

That adds up to a fluffy snowball of $614 that you’ll now be able to allocate toward your new priority debt — the credit card balance — which you’ll pay down in less than a year. Then you just rinse and repeat with the two remaining debt sources you have. 

After a little more than three and a half years, you’ll be completely free of debt and ready to do an epic happy dance. But you might cut the jig short when you realize how much you’ve paid in combined interest during that time: about $7,800.

Debt Snowball vs. Avalanche

If you’re the type to be more motivated by sheer savings, you're in luck! The debt snowball isn’t the only winter-themed debt strategy available for you.

If you choose to debt avalanche, your repayment priorities will be different than if you were to us the debt snowball. You’ll start with the debt that has the highest interest rate and then work your way down. And from a simple dollar-and-cents standpoint, it’s the better approach. 

Let’s take our example and tweak our spreadsheet to fit the debt avalanche method instead. Here we’ve added a column for the interest rate for each debt.

Debt source	Interest rate	Remaining balance	Minimum payment	Extra payment
Credit card	20%	$5,700	$152	$200
Personal loan	11%	$3,000	$262	N/A
Auto loan	8.75%	$22,000	$495	N/A
Student loan	5.5%	$18,500	$201	N/A

The debts are now arranged according to their interest rates (in descending order). We didn’t need the interest rate in our debt snowball table because it isn’t a factor in the approach. It is, however, the key consideration for the avalanche method.

In this example, you’d save about $500 in combined interest payments by using the avalanche method and paying down the debt with the highest interest rate first. That’s a respectable chunk of change to help pad your emergency fund or invest for retirement.

Choose whichever strategy is most appealing to you. The important part is doing it, and if one is more motivating than the other, that’s the right one for you. 

Advantages of the Debt Snowball Method

April Lewis-Parks, director of education for the nonprofit credit counseling agency Consolidated Credit, says the snowball method’s big selling point is its motivational kick. 

“The snowball method is a good way to pay off debt for people who like things ‘gamified’ and who like to check things off their list,” she explains. “This offers motivation and the feeling of a ‘win’ when having a bill totally paid off.”

Her observation is supported by a 2016 study of credit card debt published in the Journal of Consumer Research. This found that concentrating debt payments toward a single account increases a consumer’s motivation to become debt-free. The study also found that this effect is “most pronounced when the repayments are concentrated into consumers’ smallest accounts.”

Dr. Merle van den Akker is an applied behavioral scientist and lecturer at Australia’s University of Technology Sydney. She believes early achievements with the debt snowball method can help incentivize people to develop long-term fiscal responsibility. 

“It takes a while to build a habit, whether it's exercise or debt repayment,” she notes. “Turning a new behavior into a habit can be made a lot easier if, initially, the new behavior yields a lot of rewards. For debt repayment, this could look like actually making a serious dent into the debt to be repaid or even being able to close a card (relatively) quickly. This showcases that your new behavior is actually doing something. It's making an impact.”

Disadvantages of the Debt Snowball Method

For all its feel-good mojo, it won’t cut down your interest payments like the avalanche will. In some circumstances, you might even emerge from debt a bit earlier by using the avalanche. 

Lewis-Parks lauds the snowball’s motivational power and always includes the method in her debt education seminars. However, she reminds debtors that, “The avalanche approach is always preferred because the person will save the greatest amount of money when tackling the debt with the highest interest rate first.” 

She also reminds debtors that market factors should influence their strategy, particularly if they hold a lot of variable-rate debt rather than fixed-rate. “Credit card interest rates right now are very high, with the average hovering around 24%. Paying off debts with high rates first can really save money,” she says. 

Related: How Does Debt Consolidation Work?

Snowball or Avalanche: Which Is Better?

If you’re carrying high-interest debt, it might be wise to make that your priority and save the joy of small victories for your next cul-de-sac snowfight. But if you try the avalanche, be mindful of your mental state and consider switching to the snowball method if you sense your resolve starting to wane.

“There's a significant psychological aspect to holding debt and its repayment,” says van den Akker. “If you're the kind of person who struggles to stick with anything and needs to see a constant impact to keep going, snowballing might be more your style!”

Related: How To Pay Off Credit Card Debt

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FAQs

What is the debt avalanche?

The debt avalanche is similar to the debt snowball except instead of paying your debts from smallest to largest you pay them off from highest interest rate to lowest interest rate.

Why does the debt snowball work?

The debt snowball method works because it can be motivating to focus on one debt at a time, rather than trying to pay off all debts at once. Focusing on the smallest balance allows you to make quick progress. Start eliminating debts faster than you would using another method.

What if I don't have any extra money to put towards debt payments?

That's ok. While paying extra when you can certainly get you debt-free faster. You can still do the debt snowball even if all you can do is make minimum payments. Take note of what you are paying right now. Commit to sending at least each month. Even if the minimum payments on your credit cards go down, just keep sending in what you are paying now.

Eventually, a debt will get paid off. When it does, keep paying that same amount each month, but move the payment from the now paid-off debt to one of the remaining debts.

Of course, you also need to commit to not taking on any new debts, otherwise, you are going backward. 

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