Debt Snowball Method (Part 7)
Debt Snowball: Dave Ramsey’s method for getting out of debt
Creating a debt snowball is Dave Ramsey’s preferred method of getting out of debt. The strength of using this method is that it focuses on the behavioral side of finance rather than the mathematical. Since we are not robots that always do exactly what we know we should, I recommend this method for most people.
These are the simple steps to snowball your debt…
- Create a list of all of your debts: credit cards, car loans, student loans, mortgages, etc…
- Next to each one write down the total balance owed.
- Re-order these from smallest to largest debts (use Excel or Google Docs to make this simpler.)
- Pay the minimum payment on all of the debts - except the smallest one.
- Put every extra dollar you can find towards paying off that smallest debt.
- Celebrate like crazy when you get that first debt paid off.
- Take the amount you were paying towards the first debt and put towards the next smallest debt. Do this until this one is paid off.
- Celebrate again!
- Continue this process until each one is paid off.
What you will find is that each time you pay off a debt, the “snowball” gets larger. Since you are taking the amount you used to pay off the first debt and putting it all + the minimum payment that you were already paying to the second together, you are making more of an impact towards that debt. Each time you pay off a debt, the snowball gets larger and more powerful - which is great, because it just increases the speed that each debt gets paid off.
The numbers don’t lie
If you are like most logical people out there (like me 
) you are probably saying, “you could save more money by paying the highest interest rate cards off first.” You are right - calculators do not lie and they will give you the correct logical answer. Paying your credits cards off starting with the highest interest rate to the lowest is “mathematically” the best idea. But, let’s look it at from another angle:
If we DID what we knew we SHOULD do 100% of the time, using the mathematical approach would be best. But, we are emotional beings and even the most disciplined among us still have emotions and are affected by them.
Computers use logic 100% of the time. Humans do not. We were not created to. We make decisions based on our emotions. We get let down, we get encouraged, we feel motivated, we get scared, we feel hopeful, we feel like quitting. These are all emotional states that each one of us could feel on any given day!!
Knowing that we are emotional beings, the key is to use our emotions to our advantage. Just like jogging with the wind at your back, it is a nice little boost to use our emotions to give us a little edge. So, rather than tackling the debt like a math problem, we can tackle it in a way that will give us emotional boosts! After all, isn’t it better to get out of debt and spend an extra $100 in interest than to give up half way to our goal because we were discouraged?
Status Bars and Debt
Ever wonder why there are status bars showing you the progress of the item you are loading on your computer? It is to keep us from going crazy while waiting 10 minutes for the computer to do what we told it!! Even though that little bar moves slowly sometimes, it is encouraging because we know how much longer we have to endure the torture of waiting.
It is extremely DE-motivating when there is no end in sight. Without that “light at the end of the tunnel” it can be hard to keep going. That little bar that shows us the progress that we have made gives us hope. What if there were no status bars? Or what if you saw no progress on the bar until you got to the 70% loaded point? Would you keep waiting or would you reboot assuming it there was a problem?
When on the phone, have you ever been waiting on hold for 15 minutes wondering, “Did they forget about me? Should I wait it out? What if the never remember that I am on hold?” Do you cut your losses or wait it out having no idea when they will pick up, or if they ever will?
This is the advantage of using the snowball approach to paying down debt. If you focus on the highest interest rate, it could be months or even years before you reach that first milestone. Would you have the endurance to keep going that long without reaching that first milestone?
It is a wonderful feeling to be able to celebrate your first milestone - paying off the first credit card is a blast! Speaking from experience, I was fueled with motivation after reaching that first milestone. The fact is that most people are strengthened by seeing even a small goal accomplished. I love the snowball approach to paying down debt because it focuses on reaching these small goals first and using them as motivation to keep going. Let me know how it works for you!
If you are having trouble organizing your debt snowball, you may want to consider Debt Snowball software.
Go back to the beginning of the Getting out of Debt series
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Comments on Debt Snowball Method (Part 7) »
Snowball your way out of debt @ 12:43 am
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What a great article that rings so true!! I have been meaning to get a copy of Dave Ramsey’s book, and this just enforces that idea.
Thank you for a quick breakdown of the process! I love the fact that you mention if we done every thing 100% correct (as we know we should), we would not end up in some of the situations we get into.
@sean
Yea, the whole mathematical process of getting out of debt is based on the faulty assumption that we make all of our decisions mathematically!!
Poor Credit News » Blog Archive » Snowball your way out of debt @ 6:51 pm
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Guest Post: Make a better budget! | Bible Money Matters @ 6:23 am
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the maxx » Blog Archive » How To Make A Budget @ 7:01 pm
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This is good advice, but it would be better advice to order your debts by paying off the highest interest rate loan first. That way you lower your interest expenses the quickest and have more money to snowball.
While the snowball method may sound pretty good, it actually is not very wise financial advice. Instead, one should work towards paying off the debt with the highest interest rate first. The size of the debt is irrelevant.
I think this is great advice. And I think that you explain why you should pay the lowest debt first very well. Great article!
Very useful, like this one; If we DID what we knew we SHOULD do 100% of the time, using the mathematical approach would be best.
Might right a blog about this as well.
The ’snowball’ method works. It may not be the most mathematically efficient, but it works, and when I talk to people that are hurting, they are looking for results. They understand they have made mistakes and that is why the snowball method works, because it continues to encourage along the way. The first couple of debts that are paid off, give light to a otherwise dark situation, and every time another debt is paid off it reminds them of where they never want to be again.
I make my financial decisions based on a mathmatical approach. Payoff highest interest first is the only way to go. It’s extremely satisfying to know that I’m saving myself money. Having a spreadsheet that shows you exactly how much you are saving compared to high balance pay off first or no extra payments is a great motivator. Paying based on the balance is bad advice.
* Dave Ramsey’s Debt Snowball @ 2:56 pm
[...] About How to Get Out of Debt at Dave RamseyHow to Start and Manage a Debt Snowball at Mrs. MicahDebt Snowball Method at Christian Personal FinanceRecession-Proof Your Debt Snowball at Frugal DadEliminate Debt with [...]