How the Debt Snowball Method Works

Picture a snowball rolling down a hill at a high speed. It starts small, but with each turn down the hill, it adds another layer of snow, growing larger and larger and gaining momentum.

Now apply that theory to paying off your debt.

The debt snowball is your method of attacking debt and freeing up your finances to focus on bigger and better things (things that may involve tropical beaches, not snow). As you pay off debts, you gain a ton of momentum and you start making huge progress every month!

Here’s how it works:

Once you’re on Baby Step 2, list your debts smallest to largest by amount owed (except your mortgage—we’ll tackle that later). Don't worry about interest rates when making your list. Just focus on the actual debt.

Now it’s time to get rolling.

Pay minimum payments on all debts except the smallest. Attack the smallest debt with a vengeance. We're talking sell-out, get-this-thing-out-of-my-life-forever energy. Once it’s paid off, take the money you were putting toward that smallest debt plus any extra money you find and attack the next smallest debt on the list. Your snowball is now gaining momentum!

Once it’s gone, take that combined payment and knock out the next one until they are all gone and you are debt-free! By now, you have a pretty impressive snowball of cash on your hands that no longer has to go toward debt.

Here’s an example:

Let's say you have the following debts:

$500 medical bill

$2,500 credit card debt

$7,000 car loan

$10,000 student loan

Pay the minimum payment on each of these loans, and put every extra dollar you can find toward the medical bill. You’re going to attack this one with all you’ve got – which most likely means eliminating daily coffee shop runs and lunch outings. You’ll be throwing every spare dime toward your debt. You might even have a yard sale.

Once the medical bill is gone, keep moving forward. Now you’ve freed up extra money to apply to your credit card bill. Once MasterCard is long forgotten, focus on the car loan, and once it’s wiped out, go crazy on your student loan.

Before you know it, this seemingly insurmountable debt of $20,000 will be gone! And you’ll be free with a lot of cash on hand!

Here’s why it works:

The point of the debt snowball is behavior modification. With the debt snowball, you see change quickly.

When you ditch the small debt first, you see progress. That small, nagging debt is out of your life forever—and you begin winning! By the time you’re paying the bigger debts, you have so much more cash freed up from paying off the earlier debts that it creates a snowball effect. You are putting hundreds of dollars a month toward your bills instead of a few bucks here and there.

The point is this: When you see your plan actually working—your snowball actually growing and gaining momentum—you’ll stick to it. And by sticking to it, you’ll succeed in becoming a debt-free person who wins with money instead of owing it.