The debt snowball method is one of the simplest and easiest ways to reduce your debt in a step-by-step process. It helps you by making strategies to clear off your debts quickly. Its repayment strategy aims to eliminate the small balance debts in your portfolio. Through this approach, you will easily settle all your debts. Before we dive deep into the debt snowball method, it is important to understand what it is.

What is the Debt Snowball method?

Imagine feeling demotivated because you are overwhelmed by huge debt. You feel emotionally exhausted and unmotivated because of debts you are unable to repay. Hence, you start by clearing your smaller debts and subsequently shift your attention to the next larger debts. This boosts your confidence and enhances you by helping you strategise to eliminate unnecessary debts that could harm your portfolio.

The debt snowball method is one of the simplest, focusing on clearing debts with smaller amounts. This approach focuses on clearing debts that are of lower value. This helps you to maintain financial discipline and motivates you to clear debts. Now, let’s understand how the Debt Snowball method works for your debt portfolio.

Working of the Debt Snowball Method

We are gonna first understand the working of the Debt Snowball method step by step.

  • Compile a list of all your financial obligations.
  • Prioritise them from the lowest debt to the highest
  • Make minimum payments on all debts
  • Allocate extra money towards the lowest debt
  • Clear and settle the lowest debt
  • Apply the same strategy to the next smallest debt.
  • Continue the same strategy until you clear all the debts

Let’s understand the working of the Debt Snowball method with an example.

Example: Let’s take an example where you were able to save an amount of $1000 after deducting all your expenses. The current debts in your portfolio are:

  • $3000 of credit card with 26% APR(Annual percentage rate)
  • Car loan of $12,000 with 16% APR and
  • Personal loan of $7000 with 14% APR

Let us assume that you are making monthly installments of $100 to each debt mentioned above.

STEP-1: Compile a list of your debts

SNoDEBTDEBT AMOUNTAPR
1CREDIT CARD$300026%
2CAR LOAN$1200016%
3PERSONAL LOAN$700014%

STEP-2: Prioritise them from the lowest debt to the highest debt

SNoDEBTDEBT AMOUNTAPR
1CREDIT CARD$300026%
2PERSONAL LOAN$700014%
3CAR LOAN$12,00016%

STEP-3: Let us assume that you are making minimum monthly payments for each debt of the amount $100.

Remaining amount left(Surplus amount) = $1000- 3x$100 = $1000- $300= $700

STEP-4: Assign the excess $700 to the smallest debt, which is the $3000 credit card at a 26% APR

STEP-5: Pay off the credit card debt with the smallest debt that totals to $3000.

STEP-6: Once you clear the credit card debt, apply the same strategy to the next smallest debt, that is, a personal loan of $7000 with an APR 14%(second smallest debt)

The same strategy is applied to the personal loan, and once it is cleared, use the extra funds towards the next smallest debt, which is the car loan of $12,000 with an APR 16%.

Here, you do not prioritise paying the debt based on higher interest, but you prioritise paying the debts based on smaller debts over higher debts. This boosts your confidence and motivates you to clear the remaining debts. Hence, this approach probably won’t be the best if your goal is to minimise interest payments.

Below is a debt snowball calculator that lets you create a debt snowball table through the debt snowball method step by step.

Debt Snowball Calculator