Personal Finance

How Does Debt Snowball Work

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

You probably have some sort of debt if you’re like the average American. You probably already know that you need to make some sacrifices or earn more money in order to pay off your debt. Then, put that surplus toward paying off your debt until it is completely wiped out.

However, things become complicated when there are several bills to settle. Putting a small amount of extra money toward each of your debts won’t make a big difference if you have a number of loans and credit card balances. If you want to make a serious difference in your debt, you should devote all of your spare cash to paying down a single bill. Is there a certain order in which you should perform these tasks?

This is a question with several answers. You can choose to pay off the loan with the highest interest rate first, the smallest balance first, or just make minimum payments on all of your debts as you can afford to. These methods vary in their efficacy and come with their own set of advantages and disadvantages.

The Debt Avalanche Technique

An avalanche in the mountains always moves from the highest point on a downhill trajectory. Similarly, the debt avalanche strategy (sometimes called “debt stacking”) involves amassing debts.

You should begin with the account charging the highest interest rate, which is the highest point on your mountain of debt. After that debt is settled, the same amount is applied to the obligation carrying the next highest interest rate, and so on.

This strategy for eliminating debt gains momentum as it progresses, somewhat unlike a true avalanche. With each installment, you pay off more of your debt and increase your savings.

Debt Avalanche Method Exemplification

Let’s say you’re trying to settle four types of debt:

  1. A Mastercard with a $700 balance, an annual interest rate of 15%, and a minimum monthly payment of $15
  2. A Visa card with a balance of $3,000, an interest rate of 25%, and a minimum monthly payment of $90.
  3. A $8,000, 10-year student loan with a 4% interest rate and a $81 monthly payment.
  4. A five-year, $10,000 auto loan with 5% interest and $189 monthly payment.

Your monthly loan payments amount to $375 at the moment. It will take you 10 years to pay off your debt if you simply make the minimum payment each month and don’t incur any new debt during that period. More than $5,700 in interest will accrue throughout that time period.

You save an additional $100 per month because of your frugal habits. You apply it to the credit card debt for $3,000, which has the highest interest rate. Your new monthly cost is $190. You’re still only paying the bare minimum on your other loans.

Spending this way, you may settle the Visa payment in around 19 months. With the elimination of the high-interest loan, you may put the whole $190 that was being applied toward that debt toward the Mastercard balance. Your credit card debt will be completely paid off in a few months with this increased payment of $205.

The additional $205 is then applied to the principal of the auto loan. In 15 months, if you pay $294 each month, you will have paid it off. The next step is to include the extra $294 in your annual student loan payment until the debt is paid in full.

A little more than four years can be shaved off your debt repayment timetable with this strategy. Over that time period, you will save more than $2,700 in interest payments, bringing the total amount you will pay to roughly $2,950. Only with an additional $100 each month!

The Debt Snowball Technique

Let’s say you’re in need of a large snowball for the foundation of a snowman you’re constructing in your garden. It’s simplest to pack a little snowball and roll it down the ground, gathering snow as you go. As you roll across the yard, your snowball grows into a huge snow boulder.

The debt snowball strategy functions in a similar fashion. The smallest debt should be paid off first, as promptly as possible. Once that loan is paid off, you roll over the payments you’ve been making toward the next lowest bill.

You keep adding “snow” to your payments as you pay off debts one by one. One significant monthly installment is all that’s left to make toward your highest loan.

Debt Snowball Method Exemplification

Let’s go back to our original scenario and revisit the debt snowball in action. You owe a total of $375 each month on your four loans (two credit cards, an auto loan, and a college loan). And each month, you’ll be able to contribute $100 more toward paying off your debt.

With the debt snowball strategy, you’d make an additional payment of $100 toward your Mastercard balance, which has the smallest sum. You keep up with your other debts by paying the bare minimum each month.

This is the quickest way to pay down your Mastercard balance in as little as six months. Once you’ve paid it off, you may transfer the $115 you were paying toward it each month against your Visa balance. With a monthly payment of $205, you’ll have your debt gone in 16 months.

After the credit card debt is cleared, the $205 a month is redirected to the student loan, bringing the total payment due each month to $286. A 10-year loan would be repaid in just under two years at that rate. The loan on your automobile will be paid in full in just another six months if you pay the maximum of $475 every month.

The Debt Snowflake Approach

A debt avalanche or debt snowball relies on a steady infusion of cash that can be taken from somewhere other than your usual budget and applied to your obligations. However, when money is tight, it might be difficult to find an extra $100 every month.

Many people, however, occasionally come into a little amount of money unexpectedly. This might be in the form of a tax return, the earnings from selling something on eBay, or even just the discovery of five dollars in a coat pocket. The debt snowflake strategy entails using a number of small payments to gradually reduce outstanding debt.

Like a snowflake, each individual quantity is too little to make a significant impact on its own. However, even seemingly insignificant amounts can have a significant effect on your money, much like a snowflake can accumulate into a mountain over time.

Debt Snowflake Method Exemplification

Take a look at our sample again. Spending just $375 per month will keep you current on your $4 minimum payments and $21,700 in debt. But you really can’t afford to put any additional money toward your monthly payments.

Debt reduction strategies like the snowball and avalanche will still have some utility in this circumstance, but only to a certain extent. As soon as you’ve paid off one obligation, you may put that payment’s value toward the next one. However, it will take you around six years to repay them all if you don’t have any extra money for payback.

But let’s say that you babysit for a buddy and make $30 the first week you implement this strategy. You save the money by paying off your Mastercard balance in full instead of spending it. You may also use the second week’s $15 in points from shopping to the Mastercard.

Usually, the best sales at the supermarket occur during the third and fourth week. It’s the end of the month, and you’ve only spent $260 of your $300 grocery budget. You now have an additional $40 to apply to the balance on your Mastercard.

All of these savings “snowflakes” add up to a relatively modest total. But by putting them all toward one bill, you’ve reduced it by $85 in a single payment cycle. The debt might be eliminated in under five years if equivalent monthly savings could be found.

You obviously can’t rely on saving $85 every single month. Sometimes your little efforts will only amount to $50, $20, or even nothing at all by the end of the month. However, you might have more gains in certain months than others. You may save a lot of money in the long term if you put all of your bonuses toward paying down your debt.

Should You Use the Avalanche, Snowball, or Snowflake Debt Repayment Methods?

The most crucial aspect of paying off debt is not the method used, but the deed itself. Choose a strategy that you will find easiest to implement. Find out which strategy for paying off your debt has the best chance of succeeding by reading this.

If… you should use the Debt Avalanche Method.

If you meet the following criteria, the debt avalanche strategy is right for you:

  • You Owe Money to People at Exorbitant Interest Rates. The debt avalanche strategy is most beneficial when used on large amounts of high-interest debt. It’s the smartest strategy for minimizing interest costs and reducing debt as quickly as possible.
  • You have an affinity for numerical data and reasoning. Select the debt avalanche if the speed with which your debt is reduced is what drives you. It optimizes financial savings and accelerates reward.
  • You’ll Be Able to Handle the Bill Payments Yourself. If you want to successfully employ the debt avalanche strategy, you need to dedicate a specific amount of money each month specifically to the purpose of paying off debt. Having a stable salary and some extra money in the bank makes this process much simpler.

If… then you should use the Debt Snowball Method

In cases when…

  • I hope this finds you feeling encouraged. You should consider using the debt snowball if you find that paying off one loan quickly and in full gives you a significant boost in confidence. It keeps you going by giving you quick wins along the way.
  • You’re Attempting to Reduce Complexity. Paying off debts in advance might make your monthly bill payments more manageable.
  • You’ll Be Able to Handle the Bill Payments Yourself. The debt snowball strategy, like the debt avalanche, calls for consistent monthly payments. A stable salary and enough spare cash for monthly payments is ideal.

If… you should use the Debt Snowflake Method.

You should use the debt snowflake approach if…

  • Funding is limited. Using this procedure is effective even with very little amounts. It’s fine if you can only spare $10 or $20 from your monthly budget. Everything adds up.
  • Your Wage Is Hard to Predict. This strategy does not call for regular contributions. If your income fluctuates from month to month, this makes it easy to plan.
  • Several Payments May Be Made. For the debt snowflake strategy to work, several monthly payments without penalty from creditors are necessary. If you’re only able to pay once a month, you can save your snowflake payments and apply them to your next regular payment. However, it takes self-control to avoid spending the money.

Bottom Line

If you want to reduce your debt load as quickly as possible, the debt avalanche is the strategy to employ. If paying off debt is your top priority, the debt snowball strategy is the way to go. If you can’t afford the minimum payments each month that the first two options necessitate, the debt snowflake approach is your best bet.

It is possible, however, to mix various approaches in order to reap the advantages of each. For instance, if you’re feeling down, you may improve your spirits by paying off your lowest loan first. The next step is to start using the debt avalanche strategy to swiftly eliminate your high-interest debt.

Instead, prioritize paying off the loan with the highest interest rate if you have many smaller bills. If you have a little debt, paying it off will provide you with a rapid payoff, and you’ll also enjoy the savings that come with eliminating a high-interest loan.

Debt snowflake can be used in tandem with either of the other two approaches. Snowflake payments should be made to the smallest debt first. After you’ve paid it off, you may transfer that money toward your debt with the highest interest rate, setting off a new debt snowball. To further reduce your debt, you can keep making snowflake payments.

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