Understanding The Snowball Method

With the economy on a roller coaster adventure with interest rates rising and gas prices going up and down every week, it’s a great time to look at your credit card debt and get it under control.

One proven method is the “Debt Snowball Method.”

The Debt Snowball Method prioritizes your debts in order from smallest balance to largest. Personal finance author and personality Dave Ramsey first popularized the "snowball" method and showed many how it could work for them.

Eventually, as you pay off balances, you incorporate those minimum payments into the amount you put toward your next debt, much like a snowball rolling downhill gets larger as it accumulates snow.

How does it work?

Imagine you have the following debts. By listing them from the smallest balance to the largest, here’s how you’d tackle them using the debt snowball approach.

• Credit Card #1 - $700, minimum monthly payment $35

• Credit Card #2 - $2,500, minimum monthly payment, $75

• Credit Card #3 - $6,700, minimum monthly payment, $125

• Student Loan - $10,000, minimum monthly payment, $250

You must make the minimum payments on each debt each month in order to keep your credit score intact. The trick of the snowball is to put whatever extra you can towards the smallest debt first. In this example, let’s say you were able to pick up some weekend work and got a raise, so you contributed an additional $300 per month to your credit card debt reduction plan.

Here’s the process:

1. You make a $335 payment on credit card #1 in Month #1 and Month #2. This debt is then completely paid off by the end of Month #3.

2. In Month #4, you then begin contributing $335 from card 1 plus the $75 minimum from card #2 for a total payment of $410 each month until the second debt is completely paid off.

3. Using a debt snowball calculator, you can calculate the payoff of the second debt by the end of Month #9 and be completely debt-free 29 months after starting the program.

This method is not for everyone. But for those who love to see their short-term goals being met every few months, it’s a game changer.

The snowball method is not only popular -- it’s proven to be more effective. Recent research from a 2016 Boston University study found that the participants who focused on the smallest debts first had better success.

For more information, contact Stevie Swain at Stevie@swainconsultingllc.com.