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The Debt Snowball Method

Welcome to The Penny Hoarder’s monthly Money Challenge, helping you find simple ways to improve your finances.

This month, we’re going to help you get quick results when committing to reduce your debt. Popularized by Dave Ramsey, the debt snowball method will have you attacking your debt in order from the smallest to largest amount, gaining momentum as you pay off each one.

How it Works

1. List our Debts From Smallest to Largest

List all your debts, then order them from the smallest balance to the largest. Some examples are:

  • Credit card debt
  • Personal loans
  • Car loans
  • Student debt
  • Unpaid medical bills

Tip: Because interest rates will likely vary, some people prefer to focus on paying off the loans with the highest interest rates first. If this sounds like you, check out the debt avalanche method.

2. Budget to Pay the Monthly Minimums on All Debt

Next, budget how much you’ll have to spend to cover the minimum monthly payments on each of your debts. If you’re struggling to cover the minimum payments, look for ways to curb your spending or take on a side gig to earn extra money.

3. Attack Your Smallest Debt

Once you’re sure you can cover all your minimum payments, put any extra money you can budget towards the loan with the lowest balance on your list. The idea is to “attack” and pay off your smallest debt first to get the snowball rolling, building momentum to take on the next.

4. With One Debt Down, Attack the Next

Your smallest debt is gone – nicely done! Now, take that same amount you're putting toward the first debt and add it to the monthly payment for the next smallest debt on your list. Keep this up until the second debt is paid off.

5. Repeat

Once your second debt is paid off, continue the process with the rest of your debts. For the third debt, you’ll be paying the first and second debt’s minimum payments in addition to the third debt’s minimum plus the extra money you’ve budgeted to go towards debt.

While you may be paying more interest overall than other debt-reducing methods, the debt snowball method works well for people who need immediate results to stay motivated.

Have you tried the debt snowball method? If so, did it help you get out of debt?

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