If you're struggling with debt, the debt snowball method is one repayment strategy that could help. The debt snowball method involves focusing on paying off the smallest debt first while continuing to make minimum payments on all other debts. After you’ve paid off the smallest debt, you move onto the next-smallest, rolling the funds you were using to make payments on the smallest debt into that debt and so forth until you’re debt-free.
The debt snowball method can be motivating: it allows you to achieve quick wins by paying off their smallest debts first, creating a sense of accomplishment and momentum. Let‘s learn more about how it works.
How the debt snowball method works
Here’s a step-by-step breakdown of the debt snowball method:
- Make a list of your debts from smallest to largest.
- Start by aggressively paying off your smallest debt first (pay more than the minimum) while paying the minimum on your other balances.
- Once you’ve paid off the smallest debt, move up the list and pay off the next debt aggressively while paying the minimum on your remaining balances.
- Once the second-smallest debt is paid off, repeat the process until all your debts are paid off.
Example of the debt snowball
Here’s an example of the debt snowball method. Let’s say you have balances on three 3 cards: $500, $1,000 and $2,000.
With the debt snowball, you first use all your extra money to pay off the $500 balance, only making the minimum payments on the $1,000 and $2,000 balances. If you put $300 a month toward the $500 debt, you might pay it off in 2 months.
Once the first debt is paid off, you combine that debt’s payment with the payment you're making on the $1,000 balance. Then, you continue chipping at your debt until all the balances are paid off.
Pros and cons of the debt snowball
Pros:
- Paying off your smaller debts first and getting quick wins early on can be motivating.
- The debt snowball method is simple and easy to follow.
- Focusing on systematically paying off your debt can help you build better money management skills.
Cons:
- The debt snowball doesn’t account for interest rates. So, if your larger balances have higher interest rates than your smaller balances, you can end up paying more in interest. If your bigger balances have higher interest rates, consider the debt avalanche method.
- If you’re using all your extra money to pay off debt, this can deplete your cash reserves. This means an emergency could put you into even more debt.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
