Updated on 12.09.14

Debt Snowball vs. Debt Snowflake: Which Works Best to Pay Off Debt?

snowball; snowflake

Start digging yourself out of debt with either the ‘debt snowball’ or ‘debt snowflake’ method. Photos: redjar / Andrew Magill

Being in buried debt and not knowing how to get out of it can be very overwhelming. Add to that the many strategies, methods, and tips for paying off debt, and you may be ready to quit before you’ve even started.

Not to worry though. There are two very popular, proven ways to pay off debt: the ‘debt snowball’ method and the ‘debt snowflake’ method. But what are the differences between them? And which one is best for you?

Below is a complete explanation of both types of debt repayment strategies so you can compare which method is right for your situation.

What is the Debt Snowball Method?

The short answer: The debt snowball method is one of the most common and widely recommended strategies for anyone looking to eliminate their debts. You start by gathering up all your debt accounts and listing the balances in order from the lowest one to the highest one.

Ignore the amount of interest each one is being charged and simply create a payment plan to pay off the account with the smallest balance first. Put any extra funds you can find from saving money in your budget, and/or upping your income, toward this account.

You’ll only pay the minimum payment on the rest of your debts, until the first account is paid off. Then you’ll roll over what you had been paying on that account toward the second-lowest debt balance. And the cycle continues “snowballing” until you’ve paid off all your debts.

Here’s a more in-depth explanation of how to use the debt snowball method to get out of debt:

Step 1: Make a list of all your debts and arrange them from the lowest balance to the highest. Be sure to include every debt you have, whether it’s a student loan, mortgage, credit card, or auto loan. This step will likely be a bit of a shock if you haven’t checked in with your debts in a while, but don’t get discouraged. You’ll come out of this process with a plan of action, and feel confident about your financial future.

Don’t pay attention to the interest rate, or the date each payment is due. The only figure that matters in this step is the total loan balance on the account. Once everything is totaled, and arranged from least to greatest, you can move on to the next step.

Step 2: Total all the minimum monthly payments. Look at your statements and input the minimum amount due on each account. If you’re using a spreadsheet, list this out next to the corresponding balance of each loan account. Add the total minimum payments and see how that fits into your budget.

Do you have enough money to pay at least that much on everything? Or do you have some accounts that are behind and need to be caught up? Do you have any extra money you put toward debt? If so, how much? This will factor into the next step of the process.

Step 3: Allocate extra money toward eliminating debt. Set up your monthly payments to pay the minimum amount due on all your accounts — except for the one with the lowest debt on the list. You want to allocate any and all extra money you have toward this balance. Pay the absolute maximum you can to knock this balance down!

Can you cut back on expenses in your budget to make this happen? Do you need to ask for more overtime at work, or possibly take on a weekend job? Perhaps consider doing some freelance work, or one-off jobs.

Do whatever you can to increase the amount you pay toward that first account. The more momentum you can get in the beginning, the bigger your snowball will become and the faster you can pay off debt.

Step 4: Knock out that balance and roll over the payment to the next debt. When that first small account is paid off, roll over the entire payment toward the next balance on the list. You’ll add this to the minimum payment amount you were paying previously, to create a new, bigger monthly payment.

For example, say you were paying $200 ($50 minimum payment + $150 extra found in the budget) toward the smallest debt, and making the $25 minimum payment on the second smallest debt on the list. Now you’re going to take the $200 you had been paying toward the first account and add it to the $25 you had been paying on the second debt, bringing your total monthly payment on that balance to $225 ($200 + $25).

Step 5: Keep the debt snowball going until all debts are paid. This step is basically just rinse and repeat. This is where you continue paying off each debt and carrying that momentum forward to the next debt account and the next, until you’re completely debt free. It takes a bit of discipline during this stretch, as the balances grow larger. But knocking out each balance can keep you motivated, and it’s well worth it when you reach your goal.

The Main Advantage to Using the Debt Snowball

The main advantage to the debt snowball method is that it provides you with a few quick wins in the beginning of your debt repayment process. You’re able to pay off those first few smaller debts very quickly — sometimes even within the first month or two.

That psychological victory can help you gain momentum and confidence about your debt repayment plan and stick with it, even though it may cost more money than paying off your debts starting with the highest interest rate first.

What is the Debt Snowflake Method?

The short answer: The debt snowflake method is used to pay off large amounts of debt, or a single debt with a very large balance (like a mortgage). Tackling a mountain of debt can be intimidating, so hacking at it with smaller chunks of money makes it seem less daunting.

The debt snowflake method uses micro-sized debt payments, paid on a more frequent schedule, to slowly make a dent in your overall debt balance. Any extra money you make from a yard sale or receive for a birthday, for instance, will immediately be paid toward debt.

These small “snowflake” payments encourage the idea that small steps, taken over a consistent time period, can produce great leaps toward your goal of being debt-free. It’s also a bit easier on your budget to make smaller payments more frequently, instead of one large monthly chunk.

Here’s a more in-depth explanation of how to use the debt snowflake strategy to pay off your debt.

Step 1: Create a list of all your debts. Like with the debt snowball method, you’re going to create a complete list of every debt you have, from the lowest balance to the highest. Again, don’t worry about the interest rate on each account (unless of course you have similar-sized low balances — then go with the highest interest rate first).

Step 2: Add up all the minimum payments. You won’t be creating the same debt snowball-type repayment plan, but you still need to make sure your snowflake payments cover the minimum amount due on each account. Otherwise you could incur additional penalties and fees, which will set you back even further on your journey toward debt freedom.

Handwritten gigs and goals listStep 3: Use the ‘Gigs for Goals’ method. Instead of generally trying to save money or find extra work to increase income, you’ll be implementing a more specific strategy: Use a particular gig (like freelancing on the weekends) or savings amount to go toward one debt account.

For example, every time you go the grocery store, add up your total store coupons, savings, and discounts, and put that amount toward a designated debt. Or if you take on a weekend job, take all of that income and apply it directly to a specific debt (you can even name it if you want).

Step 4: Continue making snowflake payments until all debts are paid. You may be surprised at how quickly you pay off your first debt using this method. Once you’ve done so, continue on with the snowflake strategy and targeting specific debts with income or savings from a particular project.

Just make sure you continue paying the minimum amount on the rest of your accounts, until all your debt is completely paid off. Once you’ve completed your journey to debt freedom, you can either stop working extra jobs, or put the extra income toward other saving or retirement goals.

The Main Advantage to Using the Debt Snowflake

This strategy for paying off debt has both financial and psychological benefits, since it speeds up the repayment momentum and helps boost confidence with small but consistent wins.

You’re taking action on your debt more often (sometimes even everyday), and this leads to better spending habits and more conscious thought about your finances.

There are also a lot more opportunities for smaller changes in your life, even if you don’t have much time to take on extra work or save more money, so it seems more doable. When looking at a large amount of debt you need something that will encourage you, not another plan that’s bound to fail.

What to Consider About the Each Method

Talk to your lender first. Before making any extra payments toward debt, check with the lenders and financial institutions to see if they charge any prepayment penalties for doing so. There may be other fees attached to this if you set up recurring bi-weekly payments instead of only paying once a month.

In addition, make it clear that you’re paying down the principal balance, as some lenders will automatically apply your payment toward the next payment due, with a portion of it going toward interest.

Modify the methods as needed. If you have multiple debt accounts with similarly low balances, consider putting them in order from the highest interest rate down to the lowest. You can always modify the method to better fit your needs. You may even want to use a combination of regular monthly payments along with small snowflake amounts.

Don’t use retirement funds. No matter which method you choose for paying off debt (or if you make up your own), it’s definitely not a good idea to risk your retirement future by taking funds out of a retirement account. Similarly, if you hit pause on putting money into your IRA or 401(k) during this time, make sure it’s a short-term pause.

You don’t want to risk not having enough money in retirement because you tried to pay off debt too quickly. You can reach your goal soon enough without risking your retirement.

Use it if it works. Reaching success while paying off debt is your ultimate goal, so if the debt snowball works for you, then continue using it. If the debt snowflake seems more likely to work, then give it a try. Either strategy may or may not be the best choice for your situation, but you’ll never know until you experiment and test it out.

Which Method is Best for Paying Off Debt?

If you’re able to stick to a solid monthly plan of paying off debt, or have an average sized debt load, then the debt snowball method is likely the best fit for you. However, if you need a few small, quick wins, and some help getting over the intimidation of your debt mountain, then the debt snowflake will be a good bet.

Each method has benefits and drawbacks, so if one doesn’t work, or you don’t like it, then try something else. Ultimately what matters it that you make the effort to pay off debt and stay motivated during the entire process.

You simply have to determine which one fits your situation best, and apply yourself to that method.

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