debt snowball method

The debt snowball method offers a practical approach to debt repayment, prioritising clearing debts with the lowest balances first.

In this blog, we’ll take a closer look into the rationale behind adopting the snowball method and explore alternative strategies.

How does the debt snowball method work?

The debt snowball method allows you to pay down debts such as credit cards or loans in a systematic manner.

Begin by meeting the minimum payments on all your debts. Then, allocate any spare funds you have towards the debt with the smallest balance.

Once the smallest debt is cleared, roll over the amount you were paying towards the next smallest debt.

This process is repeated until all your debts are settled.

An example of the debt snowball method

Let’s say you have three debts to pay off:

Debt A - Total: £1,000. Minimum repayment: £50.

Debt B – Total: £2,000. Minimum repayment: £100.

Debt C – Total: £5,000. Minimum repayment: £200.

Initially, the total minimum repayments amount to £350 monthly.

With the debt snowball method, you would make an extra effort to getting Debt A paid off. For instance, you might opt to allocate an extra £50 per month towards this debt. Therefore, you’d pay £100 towards this debt each month (if you can afford this).

Once this debt is paid off, you’d take the £100 and add it to the monthly repayments of Debt B. This means each month you’d be paying £200 a month towards this debt. Then, once Debt B is paid off, you follow the same process with Debt C.

Throughout the process, your repayments remain stable and consistent, making it easier to manage your finances.

This method may help you speed up the process of repaying debt. Any extra you can comfortably afford to pay will help you pay down your debts faster. The snowball system allows you to do this in a methodical way.

However, keep in mind that repaying a debt earlier than agreed may mean you will incur an early repayment charge. Therefore, you will need to factor these costs in too. 

How to succeed with the debt snowball method

To implement the snowball method effectively, start by assessing your debts and determining minimum monthly payments. Take stock of your finances and make sure you know exactly how much you owe in each debt.

Next, you need to calculate your budget. You can do this by subtracting your monthly expenses, including your debt repayments, from your monthly income. If you will struggle to have any spare money left at the end of the month, you may need to look at your spending.

Cutting out unnecessary expenses, or finding cheaper alternatives to products you usually spend on, may help you free up extra money that can be used to pay off debt.

Then, decide how much you can comfortably afford to overpay. This depends on your situation, but remember even a small addition can make a difference.

Finally, you should implement the change. You may need to adjust your direct debits or inform a creditor of this change.

What are the benefits of the debt snowball method?

  • This method can help speed up your debt repayment, potentially reducing your repayment plan by months or years. Once you have paid off your debts, you can start saving money and focus on other financial goals.
  • Many people struggle to stay motivated when it comes to their finances; the temptation to spend any extra cash you have on something you want can be overwhelming. By focusing on the smaller debts first, you are able to make progress quickly. The sense of achievement caused by quickly paying off a debt could motivate you to keep up with the method.

What are the disadvantages of the debt snowball method?

  • Focusing on smaller balances may overlook potential interest savings. For instance, if your smallest balance also carries the lowest interest rate, delaying its repayment could be advantageous. This is where the debt avalanche strategy could be beneficial.
  • It could potentially take longer to pay off your debts, especially if your largest debt has a higher interest rate. The balance on your largest debt could keep growing, making it harder to pay off quickly.

Are there any other ways to pay off debt?

Yes, there are alternative methods to paying off your debt.

Another strategy to consider is the debt avalanche method, which prioritises clearing debts with higher interest rates before focusing on smaller balances. This approach is similar to the snowball method but directs additional funds towards repaying the highest interest debts initially.

This method may be more useful if you have multiple high-interest debts.

Finally, debt consolidation is another method you can use. This is where you take out an additional loan to pay off all of your existing debts. This means that your debt is merged into one monthly repayment, which can simplify your finances.

By doing this, it can make your debt easier to manage. This means you may be less likely to miss repayments, preventing you from getting into further financial trouble. However, it’s worth bearing in mind that doing this may extend the term of the debt and increase the total amount you repay. You can find out more about this method in our complete guide to debt consolidation

To achieve this, you would need to apply for a debt consolidation loan. With various options available, thorough research is essential to identify the most suitable one for your needs.

Before you make any decisions, it is a good idea to reach out to your current lender or creditors for help. They may be able to offer alternative repayment plans or provide advice. You can do this directly or through a debt charity. If you need more information and free advice, contact: MoneyHelper or Citizens Advice Bureau (CAB).

Summary

In summary, the debt snowball method is a straightforward way to pay off debts, focusing on clearing smaller balances first. While it may not be the most cost-effective in terms of interest savings, its simplicity and psychological benefits make it an attractive option for many.

Success with this method involves understanding your finances, sticking to a budget, and committing to consistent overpayments. Remember, the right approach depends on your goals and preferences, so choose the method that fits your financial situation best.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.