A Look at the Debt Snowball Method

The "Debt Snowball Method" has been espoused by a number of prominent financial commentators, financial counsellors and authors, most notably Dave Ramsey.

What is the debt snowball method?

Well, it's actually fairly simple. The basic premise of the Debt Snowball Method is that a person pays off their smaller debts first, and then applies future debt repayment money towards the larger debts until everything is paid off.

Here is how it works:

First, make a list of all of your debts from the smallest to the largest. Your smallest debt might be an outstanding balance at a local department store. Your largest debt might be a car loan.

After creating your list, you must then figure out the minimum payment for each outstanding debt. Write this number next to each outstanding debt.

Now, allocate a certain amount of money each month that goes towards debt repayment. This amount should be, at a bare minimum, enough to cover all of your minimum payments. The more that you can contribute, the better.

Take this money and first make your minimum payments. Any extra money? Apply it to your smallest debt. If you can pay off your smallest debt and still have money left over, then put your money towards the next smallest debt on the list.

With each passing month, you should find yourself with more and more debts that have been completely paid off. Any money that was previously used for smaller debts (that have since been paid off) will now be applied to your larger debts.

Complete this process until your list of debts has been completely paid off. This is the "debt snowball method".

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The debt snowball method works because of the psychology behind the repayment plan.

As the smaller debts get paid off, less bills will be mailed out. This will embolden the person who is paying down the debt and make them feel as though they are making real progress (which is true).

In many cases, the person who uses the "Debt Snowball Method" to repay their debts will be so pleased with the results that they will try to add even more money to their debt repayment plan every month. Eat out three times a week? Cut that down to once per week and put an additional $100-$200 towards your debt snowball plan. Taking public transit, cooking more and cutting back on your nights out can all help create extra money that can be put towards your debt snowball plan.

The debt snowball plan is a very effective method of paying down your debts.