Updated on 01.05.17

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

Trent Hamm

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

DebtStarting BalanceMinimum PaymentYou Pay
Store Credit Card$400$25$200
Credit Card 1$2,000$50$50
Credit Card 2$5,000$100$100
Car Loan$10,000$250$250
Student Loan$20,000$400$400

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

DebtStarting BalanceMinimum PaymentYou Pay
Store Credit Card$0$0$0
Credit Card 1$1,920$50$250
Credit Card 2$4,850$100$100
Car Loan$9,600$250$250
Student Loan$19,350$400$400

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

DebtStarting BalanceMinimum PaymentYou Pay
Store Credit Card$0$0$0
Credit Card 1$0$0$0
Credit Card 2$4,200$100$350
Car Loan$7,900$250$250
Student Loan$16,500$400$400

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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  1. Josh says:

    Trent, I’m glad this worked for you, but I gotta say there’s a significant flaw. Paying off your debts from smallest to largest has a strong psychological component but it will cost you money. Not all debts are created equal, and if you’re paying off low interest debts before high interest debts you’re throwing away money.

    Now, an advantage of the snowball method is that it gives you more money on a monthly basis if you need to use it for other expenses, but if you’re going to take a few years to pay off your debt and there are debts with significantly higher interest than the others you’re going to save significant money by paying toward those first.

  2. Nick says:

    There is nothing wrong with your snowball plan. You’ve seen the light and are committed to your change.

    The plan advocated by Dave Ramsey, smallest to largest, is designed with psychological rewarding to keep people on their path. A series of short-term successes – like getting their first creditor paid off – tends to keep people going.

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  4. Ryan says:

    I really dig your plan. As you mention there is some cost to it; as others have mentioned there is some cost to doing the snowball method anyway.

    I tend to agree with you fully. Making the minimum payment and having that savings available is really worth it. Think if you did not have that savings? Credit card Cash? I think my percentage rate is somewhere in the neighborhood of 24.99% for cash withdrawal.

    At the very least, you are lowering your interest rate on the loan. However minute this is (I’m not so good with interest calculations or I’d write up an example.)

  5. Man on a Mission says:

    Nice to hear someone else doing the same plan. I get lashed with a wet noodle any time a Dave Ramsey fan finds out I want to have $7,500 in savings, but have thousands in debt. They just can’t understand it. But I can…with a wife and two kids to feed it wouldn’t take much to derail us with one $1k in a “baby” emergency fund.

  6. Trucker Pat says:

    just started the plan myself, the part I like best is the psychological boost you get by knocking SOMETHING out. just getting one less bill every month spurs you on a little harder. Guess it makes the rice and beans a little more bearable

  7. Brad says:

    I’m glad to know I’m not crazy and that someone else has come up with this plan. As a freelancer, I have months of (relatively) massive income follwed by one or two months of almost no income, so I feel like there needs to be 6 or 8 months of living expenses sitting there collecting interest at all times. I have a separate savings account for the debt snowball. I also only go into debt for career related expenses – the (enormous) student loan at fixed 2.75%, and expenses related to working abroad much of the time. I’ve learned not to feel guilty about going into business debt – even GE has debt on the balance sheet. In the end, I’m convinced the snowball will get rid of all the debt, but will do so without causing my hair to go gray any faster than it already is…

  8. Dave L says:

    Hey Trent, i like your system. my question is, do you really need such a large emergency fund? I think what you really need in an emergency situation, is access to credit (which is what you already have.) In an emergency, you may go into more debt, but your debt was smaller to begin with because you were paying more.

  9. Eli says:

    I too felt the need to modify the plan just a little by keeping 4 times the recommended “baby” emergency fund. The hardest step for me was cutting back on my 401k contributions to hasten debt reduction. Nevertheless I told myself that this year I was gonna go whole hog and get it done. And I have to give kudos to Dave, so far its working beautifully. A car loan which would have been paid off in fall of 09 will be paid off this may instead. A student loan which could easily last until 2020 will be gone summer of 09.

    I also took Mr. Ramseys advice and refinanced my house to a 15 year fixed rate. It’s amazing how fast it amortizes. 30 year mortgages are basically slavery contracts when you do the math.

  10. Tricia says:

    I am happy to see that I am not the only one to use the save and snowball system. I know from experience that $1000.00 isn’t enough for an emergency fund. Lacking a savings and putting all extra income into your credit card payment ends up placing you at a greater risk of never paying them off.

    We have all had the defeating experience of paying down a significant portion of debt, just to have an expensive emergency crop up, forcing us to use our credit cards because we have no backup savings.

    For years my husband and I took the old advice of pay off debts first and build significant savings later. Finally, after many defeats, we have decided that this advice does not work. You need an emergency fund of some bulk or you will be continually using credit to fend off crisis.

    This is the plan that is working for us.

    When looking at our spending my family discovered that most of our emergencies, weren’t true emergencies, they were periodic expenses. You know, bills that do not come monthly such as car insurance and Christmas, but can crash a monthly budget so badly that you use credit to fill in the gap. Therefore, we designated a savings account for periodic expenses and make monthly payments into it. When one of those quarterly or yearly bills come, we use this fund, thereby keeping our true emergency fund safe.

    We have consolidated down to two credit cards which offered low rates for the life of the loan. We pay more than minimum on both because a history of only making a minimum payment can cause some creditors to raise your rates.

    For the first card we choose the minimum payment for the month of Jan 2008 and just keep paying that amount even though the actual billed minimum has steadily decreased. This protects our low interest rate and does give us a bit more off of the principal each month.

    For the next card we pay 20% more than minimum using again Jan 2008 as our guide. This is the card we are focusing on paying off.

    We now put as much into our emergency savings as possible. This is the savings that will keep us from using credit to get through an emergency. By continually adding funds to it, eventually it will grow even if used occasionally for the unexpected. Then when that savings is $1000.00 more than the current balance of the debt, pay off and repeat for the second card.

    We are going this route so we maintain a bulk in savings just in case. The payoff period leaving us 1K in this account does carry some risk, but it is offset by the fact that in an emergency we would no longer have to make that credit payment. And in the following months, adding that payment to our savings account would quickly replenish the fund. Additionally, we would still have the periodic savings account if needed.

    This has been the only way we can imagine paying off significant debt and lowering risk. Just knowing that the funds are there if needed has lifted that continual cycle of debt despair and desperation that current financial advice tends to ignore. I hope that my family’s experience can help someone and I strongly urge that anyone with sizable debt sit down and fashion their own save and snowball plan.

  11. Jessica says:

    Here’s another way to paying off debt, kind of similar to what Tricia was saying.

    *First of all don’t add to it! Think of your debt like dirty dishes. If you are washing dishes in the sink and people keep bringing you more they won’t get done. Same way with your credit cards–if you keep using them they won’t get paid off.

    *Second, fix your minimum payments where they are now. If your minimum payment is $45 this month, pay $45 per month every month until it’s paid off.

    *Then, line up your debts from smallest to largest, the mortgage being the last one. The emotional payoff from paying off that first debt is huge and will want to make you keep going.

    *Finally, as each debt gets paid off, add it’s payment to the next one in line.

    Of course it is recommended that you have an emergency fund before tackling your debt. The reason this debt payoff method works so well is because you are only paying the minimum (plus more once each debt gets paid off) you are putting something into savings while getting your debts paid off at the same time. It’s a win/win situation.

    I do agree with the idea that once your credit cards are paid off that you should finish building your savings before tackling your mortgage.

  12. lolo says:

    I loved this program! I have been doing this for 4 months now and my progress has been amazing! My debt is acutally going away finnally! I only have 2 more debts to pay and I am home free!

  13. Mike says:

    As was mentioned by the first poster, the most fiscally responsible method is to pay off the HIGHEST interest rate debt first. So rather than order of smallest to largest (total debt) it should be highest to lowest interest rate. In my case my largest balance also happens to be my lowest rate (on credit cards) and some of my smaller balances are my higher rates. But that is just good balance transferring on my part (consolidating a large amount at the lowest rate possible).

    Now if you have some that are really close (rate wise) the psychological factor of paying off the smaller balance first may be worth it, but that is something you would have to evaluate yourself. In my case I have both a 1.99% & 2.99% until paid off on one card (two different balance transfer “offers” at different times – largest balance), 3.99% and 5.99% until paid off (the 3.99% is smaller than the 5.99%), and a few other small balances in the 13-16% range. Obviously I would like to pay off the small balances at the higher interest rates first. Mostly because they are higher interest, but it helps that they are smaller, so it is easier to envision paying them off soon.

  14. Debt Freedom Plan says:

    I’m late reading this by about four year but I really like this. The g-note bandied about for emergency funds woudn’t get me through a month’s rent most places so if the bank, bad luck, or both come a knocking, i want a 5 figure emergency fund, and then once that’s i place I’ll start with the debts. It’s not like the debt is going anywhere

  15. valleycat1 says:

    Another late poster here – browsing the archives during some downtime….I want to reiterate what #11 said- you freeze your payments at the starting minimum payment amounts (as it’s assumed you can afford those)and pay that same amount every month (don’t make the dwindling reported minimum payment amount due on the statement). That way, by the 2nd month you’re actually making a payment larger than the minimum payment on everything. The other trick I used was that if I added charges to a card, then the next payment was that amount in addition to the minimum. That not only keeps the amounts under control but gets you in the habit of paying off the card charges every month.

  16. Ranga says:

    Thanks to TSD & Ramsey, for trying to help people out of debt.
    I have two big loans totalling to 2.5 years of my post-tax income.

    I preferred to first build a 3-month emergency fund = 3x(monthly expense + EMI).
    Reached that level, so put the 3xmonthly expense in a 45-day 7% FD, & kept the 3x EMI at 4% savings account.
    Now, doing extra payments at the higher-rate loan. Want to kill the bigger demon first.
    The second loan is lesser amount, can be done in 6months .

    Best Wishes everybody !

  17. Amber says:

    I’ve done both the Ramsey Snowball method and a similar one but focusing on the higher interest ones first. I can understand the thinking behind Ramsey’s – the “seeing results” to encourage continuation – but I prefer to know I’m saving money by paying off the higher interest rate debt versus seeing my smaller (often no-interest) debt disappear. Yours is a good, understandable plan, too. Like I say – budgeting is like dieting: do what works for you or it won’t work at all and you’ll end up eating a quart of mint chocolate chip ice cream at 9pm.

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