Advantages of the debt snowball method This strategy may also help you get a better handle on your finances overall — and your stress. By allowing you to focus on one debt balance at a time, the snowball method eliminates worry about how to tackle all of your debt at once.
Since paying debt off can often take years, that motivational component is vital. The debt snowball method directs you to pay your debts off by starting with the smallest one and working upward. Each time you pay a debt off, you reallocate the money you spent on that bill to pay off the next-smallest debt.
Debt Snowball. Preferred method of debt repayment; includes a list of all debts organized from smallest to largest balance; minimum payments are made to all debts except for the smallest, which is attacked with the largest possible payments.
The debt snowball is a debt payoff method where you pay your debts from smallest to largest, regardless of interest rate. Knock out the smallest debt first. Then, take what you were paying on that debt and add it to the payment of your next smallest debt.
Debt Snowball Example
You'd make the minimum monthly payment of $50, plus any extra money you can allocate for repaying this debt. Let's say the additional amount available is $100. Therefore, you'd pay a total of $150 each month for the medical bill—while paying the minimums due on the other three accounts.
In terms of saving money, a debt avalanche is better because it saves you money in interest by targeting your highest interest debt first. However, some people find the debt snowball method better because it can be more motivating to see a smaller debt paid off more quickly.
In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow, hence the name.
Prioritizing debt by balance size.
This strategy, also called the snowball method, prioritizes your debt payments from smallest to largest. You'll continue to pay the minimum on all of your debts while focusing the majority of your repayment efforts on your debt with the smallest balance.
With the debt avalanche method, you order your debts by interest rate, with the highest interest rate first. You pay minimum payments on everything while attacking the debt with the highest interest rate. Once that debt is paid off, you move to the one with the next-highest interest rate . . .
The truth about the debt snowball method is it's a motivational program that can work at eliminating debt, but it's going to cost you more money and time – sometimes a lot more money and a lot more time – than other debt relief options.
Article highlights. You can successfully pay off debt with either the snowball or avalanche method. Paying off smaller balances first (debt snowball method) gives you motivation to keep going. Paying off higher-interest debt first (debt avalanche method) can save you more money.
The best way to pay off $3,000 in debt fast is to use a 0% APR balance transfer credit card because it will enable you to put your full monthly payment toward your current balance instead of new interest charges. As long as you avoid adding new debt, you can repay what you owe in a matter of months.
If you were to make only the minimum amount due on all of your debt, it would take about five years to become debt free. In contrast, using the debt snowball method by paying an extra $100 a month on your smallest balance, you'd be out of debt in about three years and save nearly $1,800 in interest.
The advantage of the debt avalanche method is that it reduces the total interest you pay in the long term. Interest adds to your debts because most lenders use compound interest. The accrual rate depends on the frequency of compounding—the higher the number of compounding periods, the greater the compound interest.
They stay away from debt.
One of the biggest myths out there is that average millionaires see debt as a tool. Not true. If they want something they can't afford, they save and pay cash for it later. Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary.
Completing a mortgage payoff early could save you a bundle of money, not to mention years of not having a big payment hanging over your head each month, according to Dave Ramsey, financial guru, author and host of “The Dave Ramsey Show.”
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time.
Some examples include: Business Loans: Debt taken to expand a business by purchasing equipment, real estate, hiring more staff, etc. The expanded operations generate additional income that can cover the loan payments. Mortgages: Borrowed money used to purchase real estate that will generate rental income.
Although ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.