The Snowball Method for Paying Off Debt

Debt reduction

I'm a fan of the avalanche method too, but I would love to hear how people like use the snowball method. Pros vs Cons? As for helpful tips, I would say it helps me to physically write down every transaction I spend money on: groceries, gas, lunch out. This way I don't forget about the purchase and I can add up the totals at the end of each week. It's almost like a competition to see how little I can spend and the left over money does towards paying off my debt.   

The avalanche method is best. Why? Because the goal is not only to reduce your debt but to pay the least amount for carrying that debt. The snowball method can cost you more to use depending on your combined debt and the monthly interest payments you accrue.

Vertex42 has a great spreadsheet for comparing which method is going to save you more long term, and includes the ability to customize it (like paying a small one off first, then tackling a higher interest rate).

I've tweaked it by copying the estimated pay off dates to the bottom and enjoy seeing the pay off dates reduce as I add extra money each month. 

I also love their monthly budget and checkbook register spreadsheets!

https://www.vertex42.com/Calcu...tion-calculator.html

I've used both methods, and have found that when I REALLY need the motivation to keep going, the snowball method works best for me. While I might end up paying slightly more than if I used the avalanche method, the snowball method helps me see wins faster - which helps me stay motivated to roll that amount over to another debt once the first bill is paid off. 

Hi, I am new to the site. I am deeply in debt and going through a divorce. I am trying to figure out basically how to get back on track and where to start. My husband handled the finances and I am trying to figure out how I am going to pay off my debt and keep my head above water.  Any suggestions of where to start would be great.

Thanks.

I have never tried it.  I cannot afford to have debt.  My bills consist of rent, electricity, rental insurance, and the Internet.  They are paid on time every month--the amount that I am required to pay.  One exception is rental insurance.  I pay that once a year in full.  If I could afford to I would do the rest that way.

@MsKimberly I agree, it would be nice if we could pay off some of those bills in full rather than monthly!

@Moore Income  Jon, I am determined that once I am moved into my new apartment, the next bill I want to pay at least 3-6 months in advance is the Internet.

@MsKimberly That sounds like a good plan. Will they let you pay ahead on internet bills or does it vary by company?

@Moore Income Jon, I have not asked.  However, if the cost is the same each month, I think they would be thrilled to have their money upfront whether or not a contract is involved.  Who doesn't want their money yesterday?

Ive heard of both of these, but haven't begun to use them. I have three credit cards, two retail and one medical. However one went from retail card to a real credit card through Citi. Allows me to use it anywhere now, not just at the store I originally got it from...yeah me. NOT. Anyhow, I don't feel our family makes enough money to do either one of these debt reduction tactics (even though I'll look into it more), but I do pay a little more each month just not a great deal more. What I am thinking about doing (just haven't taken the plunge yet) is get an interest free credit card to pay off the other two cards I have. That way I can be interest free for the next 14 to 18 months and what I pay will actually go towards the principal, not interest. My only issue about moving forward is not knowing how much my monthly payments will be. Im thinking they'll keep my payments pretty low so they'll ensure I'll go past the 14/18 mos and start paying interest, but Im not so sure. Or should I just take the amount of tmy debt and divide by the # of months and pay that no matter what?

@TinaS Both of these methods are simply a way to pay your cards off quicker in a strategic manner. Even if that means a little bit at a time. Whatever you can do, by applying one of these methods, the results can be much better.

I have done what you are thinking about doing. I transferred my balance from one card that was going to start charging interest to a card with a no interest sign up bonus.

The only things you need to make sure of is that the card you transfer too includes the no interest bonus on any balance transfers, and check on the fees for balance transfer ahead of time. I have seen some that don't charge a fee for the transfer but then start charging interest right away and vice versa.

Balance transfers can be helpful in taking some of the stress off and in your situation, it might help you pay them off quicker if you consolidated all your cards into one.

I'm currently using the snowball method of paying debt off. Lucky for me I have no debts that incur interest or otherwise I would use avalanche method. I have 3 of 8 paid off, by using snowball. What's difficult about paying the debt off is, being on a fixed income and having a crapload of responsibility to endure and then another unexpected expenditure pops up. Also too, trying to work on raising my credit score(eg. Credit Builder Loan or a secured credit card)and budgeting for it. Makes it difficult at best. Then there's the budget plans like 50%/30%/20% and more recently I saw a 60%/20%/20%. The thing that stinks about all of this is, I  wouldn't be in this mess if I didn't listen to my x. My credit would be in better shape. Not trying to play the blame game but, she had a lot to do with it. Ultimately the responsibility is mine. After, that fabulous disaster, I made an oath to myself and that's I'm going to do what I have to do for me first and if I lose people along the way, oh well such is life.

The higher number of debts you have to pay off, the more effective the snowball method becomes.  Its main advantage lies in breaking down these debts into the manageable chunks and the corresponding psychological payoff of crossing debts one by one (even if you have to pay a little more interest over time when compared to the avalanche method).  Regardless of the methods, they are all directly correlated to the level of budgetary discipline; just like going to the gym.  I found one tool to help with getting a little boost that doesn't affect credit score is to get some of your interest charges refunded through Harvest.  They also have a debt snowball calculator built off of your specific debt profile to make the calculations a bit simpler.

Last year I had 7 different debts of all sizes, retail cards, student loans, dental, etc. I used the Snowball method at first because I need the motivation of seeing a win, no matter how small. I got a part-time job and used all that money toward the debt and now I am down to the last 3. Yay me! However, here's what I learned re: your credit score and paying off debt. Paying off my Student loan debt felt SO good; getting that weight off my back after 12 years. My payments increased every year and my anxiety about the increasing payment amount kept building as I approach retirement. BUT, items like school loans and personal loans are not revolving credit lines so when they are paid off, POOF! That "available credit amount" is removed from your total available credit amount that is used to calculate your credit score. And just like that with my biggest source of anxiety paid off, my credit score actually went down. I was bummed but still glad that school loan was gone. So for my remaining 3 debts: 1 credit card, 1 car loan and 1 personal loan, I've decided to concentrate on the credit card. Period. Because when that's paid off my credit score will go up since the outstanding debt to available credit ratio will be in a much better place. And, that payment amount is also the largest of the 3 so my monthly cash flow will be in a better place as well. 

GinaH posted:

Last year I had 7 different debts of all sizes, retail cards, student loans, dental, etc. I used the Snowball method at first because I need the motivation of seeing a win, no matter how small. I got a part-time job and used all that money toward the debt and now I am down to the last 3. Yay me! However, here's what I learned re: your credit score and paying off debt. Paying off my Student loan debt felt SO good; getting that weight off my back after 12 years. My payments increased every year and my anxiety about the increasing payment amount kept building as I approach retirement. BUT, items like school loans and personal loans are not revolving credit lines so when they are paid off, POOF! That "available credit amount" is removed from your total available credit amount that is used to calculate your credit score. And just like that with my biggest source of anxiety paid off, my credit score actually went down. I was bummed but still glad that school loan was gone. So for my remaining 3 debts: 1 credit card, 1 car loan and 1 personal loan, I've decided to concentrate on the credit card. Period. Because when that's paid off my credit score will go up since the outstanding debt to available credit ratio will be in a much better place. And, that payment amount is also the largest of the 3 so my monthly cash flow will be in a better place as well. 

you paid off your student loans and your credit went down? How is that possible?? Sound like a scam to me! If that's the case, I might as well not even pay my student loans off. 

Swayla Monche posted:

 

you paid off your student loans and your credit went down? How is that possible?? Sound like a scam to me! If that's the case, I might as well not even pay my student loans off. 

Don't give up!  It turns out the drop in my credit score was temporary. And as I pay more down on my credit card and other bills, my score keeps getting better. 
The point I wanted to make was if you have money and are making a choice as to what bill to pay off first, choose a bill like a credit card to keep your credit used/available credit ratio in good shape. When you pay off a car or student loan, that available credit is closed and reduces your available credit amount, which also has an effect on your credit score that is separate from just getting the bill paid off.  

Can someone explain the snowball method? I have a few credit cards I would like to pay off soon.

The Snowball method is where you pick the debt with the smallest balance. You make minimum payments on all of your other debts and put every penny you can manage on the smallest debt to pay it off fast. Then when that debt is paid off, you take the payment from that debt and start applying it to the next largest debt. 

The theory behind this method is that seeing quick wins will keep you motivated. You might pay a little more in interest overall but the motivation of seeing a "win" keeps you going. 
The Avalanche method works on paying off the debt with the highest interest rate first. 
The DOLP method (from David Bach's Automatic Millionaire books) says to calculate each of your debts by the number of months it would take to pay it off using just the minimum payment. THEN, pick the debt with the lowest number of months and apply every extra penny to paying that debt off as soon as possible. 

Basically whatever will keep you motivated and moving forward is the method to choose to start with. You can switch methods at any time. Last year  I used the Snowball method to wipe out 4 of my 7 debts. I like quick successes to keep me motivated and going toward my goal. 

I have used the snowball method as well because getting debts smaller debts out of the way first creates positive momentum for me. Then, on to the next and the next. Yes, I'm concerned about the interest rate but not as much as knocking some things off the board.

Aww ok, what about when you get the secured card to buy things on credit and pay if off on the due date... for example if I get qualified Dr a secured card that has $1000 loaded on there and I can only spend 30% ($300) when it's time to pay that back, do I just pay the $300 or would I have to pay the whole $1000 back?

@Swayla Monche  If you have a secured card that has a $1000 limit and you spend $300 of that limit, you now only have $700 available for spending. When the bill comes you pay back the $300 that sets your available spending limit back to $1000.  Does that answer your question?

Nevermind someone already did this.  Could someone describe these 2 methods to me. thanks

@Leslie Kay posted:

Nevermind someone already did this.  Could someone describe these 2 methods to me. thanks

Debt Avalanche method: Saves you money in interest in the long run. 
1. List your debts with remaining balance and interest rate. 
2. Pay the minimum payment on all your debts except for the one with the highest interest rate. Put all your extra money against this debt. 
3. Once that debt is paid off, use that payment and any extra money on the debt with the next highest interest rate.

Debt Snowball method:  Gives people a faster feeling of accomplishment
1. List your debts with the lowest balance first to the debt with the highest balance.
2. Pay minimum payments on all your debts except the debt with the lowest balance. Put all your extra money against this debt. 
3. When that debt is paid off, use that payment $ plus any extra money against the debt with the next highest balance. 

DOLP: Done on Last Payment - A method proposed by financial author David Bach
1. List your debts with current balance and minimum monthly payment amounts.
2. Now divide your balance by the minimum payment amount to get the number of months until that debt is scheduled to be paid off. i.e. $1000 balance with a $200 minimum monthly payment = 1000/200 = 5 months. 
3. Throw any extra money against the debt with the smallest DOLP number to pay it off faster. 
I have used a combination of the Snowball (to get me started and feeling accomplished) and the DOLP methods to tackle my debt.  Basically whatever will keep you motivated and moving forward is the method to choose to start with. You can switch methods at any time. I like quick successes to keep me motivated and going toward my goal. 

Hope this helps! 

Thanks for explaining that. I didn't realize I was using the Avalanche method until I saw this. I always went with paying highest interest card first regardless of amount owed. Now, all debts paid except student loans. Since mine are not in one combined payment, I will apply the largest amount of payment to the highest interest loan. I do have some that were not on the US government forbearance program. So now is a good time to pay more on them.

#StudentLoanStrategy