The Snowball Debt Elimination Method

Millions of people in America are on a path to becoming debt free and are applying simple living tactics to help accomplish this goal. Using a snowball to organize debt elimination is the fastest way to kill debt outside of winning the lottery.

There are many different styles of debt elimination snowballs, but the two most commonly used are debts arranged by interest rate from highest to lowest, or by balance from lowest to highest.

Debt Snowball by Interest Rate

This style of snowball has the debts in order by highest interest rate to lowest. This arrangement pays the lowest of amount in interest overall by the time debts are paid off.  For example:

Creditor Balance Owed Interest Rate Minimum Payment
Mastercard 7,500 13.5% $130
Dell Laptop 1,500 11.2% $75
Truck Loan $18,600 6.8% $415
$27,600 $620

The total amount of minimum payments in this example is $620 a month. To get the snowball rolling, you’ll need to come up with an additional amount…say $300, or whatever you can afford. This is how it works:

  • The payment for Mastercard (since it is first on the list) will now be $430 a month ($130 + $300) until it is paid off.
  • Next up is the Dell Laptop which the snowball amount (now $430) is added to the minimum payment of $75 for a total of $505 a month.
  • Once the laptop is paid off, then you’ll have a whopping $920 ($505 + $415) snowball going towards the truck every month!

Using the scenario above, the $27,600 would be paid off in just under 3 years. Paying only the minimum without a snowball would take over 4 years with a lot more interest paid. The more you can add to the initial debt elimination snowball, the faster you’ll be debt free.

Debt Snowball by Balance

The balance style has debts arranged by the lowest to highest balance and debts paid off in that order. You’ll pay slightly more interest (about $35 more in this scenario), but everything is paid off in about the same amount of time.

Creditor Balance Owed Interest Rate Minimum Payment
Dell Laptop $1,500 11.2% $75
Mastercard $7,500 13.5% $130
Truck Loan $18,600 6.8% $415
$27,600 $620

People will argue about which style is the better one, but studies have shown that the balance approach works better and here’s why:

The first debt in the interest rate style is knocked out in about 20 months. In the balance style, the first debt is gone in 5 months and psychologically, this is extremely satisfying. You can actually see results in a timely manner and will be more apt to stick with the plan and see it through.

Here is a link to a free (and so far, the best) online Debt Elimination Snowball spreadsheet.

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