The Debt Snowball Concept: How I Made It Work For Me

I’m a sometimes listener to Dave Ramsey’s radio show (it’s not consistently on the air in my area) and I’ve recently read Ramsey’s The Total Money Makeover. In both, Ramsey advocates a concept for getting out of debt that he calls the “debt snowball.” Here’s how it works.

The Debt Snowball: How It Works

Step 1: First, make a list of all of the debts you have, arranged from the smallest balance at the top to the biggest balance at the bottom. 

When I first made a list like this, it actually hurt. I had several credit card bills, an automotive loan, and multiple student loans. No home loan (yet), thank God, or else I might have had a coronary right then and there.

Step 2: Allocate as much of your monthly budget as you can to debt elimination.

Right now, we’re budgeting about 35% of our income toward killing the debt. We did this by trimming away a lot of wasteful spending and converting that straight into debt reduction payments.

Step 3: Make minimum payments on all of the debts, except for the one at the top of the list.

I literally made a list of each minimum payment and kept a running total of them to see how much I had left in my “debt” budget. The debt budget slowly got smaller, but the bills were getting paid and I knew that the end would be good.

Step 4: As for that low-balance debt on top, pay the absolute maximum amount you can on that debt until it’s gone.

This meant that a pesky, small credit card bill went first. It only took a month of this focus to eliminate the first one – and it felt really good.

And that’s the magic of the debt snowball — it feels good to make quick progress on your debts, and can help you stay motivated through what is often a painful slog.

The Debt Snowball In Action

Why is it called a debt snowball? Once you’ve paid off a debt, there’s a new debt at the top of the list. But suddenly there’s also one fewer debt that you’re just making minimum payments on. So the amount of money you can apply each month to paying off this new “top” debt gets a little bigger.

Here’s an example of how it works. Let’s say you have five debts besides your mortgage, totaling $37,400, and you’ve freed up $1,000 a month to put toward them.

Debt Snowball, Months 1-2

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Paying the minimum due on the larger debts leaves you with $200 a month to put toward your store credit card balance. At that rate, you’ll have it paid off in two months. In Month 3, take the $200 you were paying toward the store credit card and add it to the $50/month you were already paying on Credit Card 1:

Debt Snowball, Months 3-11

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In eight more months, you’ll have Credit Card 1 paid off entirely, too. Pause a moment to celebrate; then, roll that $250/month into the $100/month you’ve been paying on Credit Card 2, for a total of $350/month on that debt:

Debt Snowball, Months 11-21

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In about 10 more months, you’ll be totally rid of Credit Card 2 as well, and able to put a full $600 a month toward your car loan. That will get it paid off in no time – at which point you can pump the full $1,000 a month toward the student loan balance.

Each time you pay off a debt, the amount you can apply to your remaining debts is a little larger, much like a snowball rolling down a hill and picking up momentum. And those little victories – which come quickly in the beginning – help keep you motivated.

When all of your debts are gone, you’ll be living a lifestyle much cheaper than what you can afford, so you can take that snowball — $1,000 a month in this example — and start investing it and saving it.

My Own Variation of the Debt Snowball

In my own life, I’ve been using a variation on the snowball system. I call it the “scared straight” snowball. Basically, it works the same as the debt snowball, except that I just make minimum payments on all of my debts and put the remainder of my “debt elimination” budget into a high-yield savings account. Once the amount in that account exceeds the amount remaining on my top debt by more than 30%, I write a check to pay off all of that remaining debt, leaving me with fewer minimum payments each month and more to “snowball” into my savings account.

Why do I do this? It’s less cost effective than the real snowball method, that’s for sure, so I’m losing some money doing it this way. But I gain something valuable (to me) in return, and that’s security. If you follow the traditional debt snowball route, it’s assumed that you have a small amount in an emergency fund in case things go bad. Well, I often feel like my emergency fund is far too small. I imagine my job disappearing or my child getting hurt or a vehicle dying or some similar disaster – or a combination of disasters. As a child, I watched such incidents happen and nearly tear my family apart – and I swore I would never allow myself to be in that tenuous of a situation.

So for now I do the debt snowball my own way, with a bit less risk. Call me chicken if you wish, but this method gives me a sense of security that I don’t get from the ordinary debt snowball.

This post was originally published in December 2006.

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

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.