Paying off Debt: The Snowball Method

Paying off debt by using the snowball method, which has been greatly promoted by Dave Ramsey, the national radio host, is a debt reduction tactic related typically to paying off credit card debt. It has received popularity over the years for some people.  So, exactly how it works?  Here are the essential steps:

1) List your debts from the smallest debt amount to the largest one, instead of listing the debt with the highest interest rate first.  Although some debt reduction tactics emphasize the importance of paying off credit card debt with the highest interest rate first, the snowball method focus on paying off the smallest balance first.

2) Make sure you are committed to pay at least the minimum payment on each credit card debt.

3) Add up all of your monthly expenses and monthly income.  Find out how much money left after all these expenses.

4) While making the minimum payment on all your card debt, you want to apply your remaining income to the smallest debt until it’s paid off.

5) Once you have your first card debt paid off, you need to continue to make the minimum payment on all your other debts and again apply your remaining income as well as the minimum payment from the account you just paid off to the next smallest debt balance.

6) Just continue the same process until all debts are paid off.

This kind of method of paying off debt works well when people keep the momentum going on and on. However, the reality is that it rarely works well because most people tend to lose the momentum after a few tries.

The Drawbacks of Snowball Method

This method does not provide enough debt relief for people with massive debt and it is not a bankruptcy alternative either. For people who are looking for debt relief options and trying to reduce debt to avoid bankruptcy, this method is mostly useless because it automatically presumes you have enough money to pay for more than your minimum monthly payments. Instead, debt settlement or filing for bankruptcy may be more appropriate, if those of you that fall under this category.

Another drawback of snowball method is you are supposed to free up some money for the purpose of paying down the debt.  With that said, you will have to stop any retirement contributions during this period.

So, as you can see, paying off debt thru the snowball method may not work well for some people. Will that work for you? You really have to evaluate your current financial situation before jumping into this method.