The snowball debt method is a powerful tool to pay off your debt. The idea is to start with the smallest balances first for quick wins.
In this post, I’ll show you exactly how to calculate your snowball debt and set up a plan to get out of debt once and for all.
What is the debt snowball method?
The snowball method is a debt repayment strategy that prioritizes paying down your smallest debts first. Every month, you would pay the minimum payment on all of your debts. Then, any extra money you have left for additional payments goes toward the debt with the lowest balance. This is going to be the easiest debt to clear first. Once you’ve paid it off, you move to the debt with the next smallest balance.
How to calculate your snowball debt
It shouldn’t take you more than 30 minutes to calculate your snowball debt and get a debt payment plan set up. Here’s how it’s done.
Find the total of each of your debt accounts
Start by making a list of all of your debt accounts. These could include student loans, auto loans, personal loans, and credit card debt (again, mortgages are excluded from the debt snowball method). Next, check the current balance on each of your debts. This will help you determine the first debt to tackle (the one with the lowest dollar amount balance).
Here’s a simple example:
| Type of Loan | Current Balance |
|---|---|
|
School loan |
$25,000 |
|
Car loan |
$5,000 |
|
Credit card |
$10,000 |
Find the interest rate of each of your debt accounts
Next, check the interest rate for each of your debt accounts. While the snowball method doesn’t prioritize a payment schedule on the basis of interest, this can still impact the total balance of your accounts and the payment amount due each month. Continuing with the above example, here’s what this could look like:
| Type of Loan | Current Balance | APR |
|---|---|---|
|
School loan |
$25,000 |
3.99% |
|
Car loan |
$5,000 |
12% |
|
Credit card |
$10,000 |
16% |
Focus on paying off the smallest debt account first
Using the information above, you can set a payment schedule and determine which creditor to pay first. Since your car loan is the smallest, start here. After you’ve made the minimum monthly payment on each of your loans, put your extra cash toward the car loan.
| Type of Loan | Current Balance | APR |
|---|---|---|
|
School loan |
$25,000 |
3.99% |
|
Car loan |
$5,000 |
12% |
|
Credit card |
$10,000 |
16% |
Keep reapplying payments to the next smallest balance
Once you pay off the smallest debt, you’ll move to the next one. In this case, once you finish with the car loan, you’ll roll over the extra money you were putting toward that debt each month and now use it to pay off your credit card. Once that debt is paid off, you’ll tackle that pesky student loan.
| Type of Loan | Current Balance | APR |
|---|---|---|
|
School loan |
$25,000 |
3.99% |
|
Credit card |
$10,000 |
16% |
This method keeps your momentum going and makes sure you’re always making progress.
Who is the debt snowball method ideal for?
The snowball debt payoff method is great for people who have multiple types of debt with different balances. You can use it to prioritize your debts, making it easy to know which one to pay first.
The debt snowball method has a few key advantages that make it popular for people trying to cut debts:
- Motivating: Having multiple liabilities is both financially draining and stressful. The debt snowball method allows you to trim down your list of debts quickly. You’ll then be inspired to keep going. It’s a great way to avoid feeling stuck in a debt rut and get rid of that “just keeping my head above water” feeling.
- Easy to implement: The debt snowball method is straightforward and simple. All you have to do is make a list of all of your debts and their balances, pinpoint the lowest one, and then focus on paying that one off. You don’t have to stress about calculating annual percentage rates (APRs).
- Empowering: By allowing you to pare down your list of IOUs efficiently, the debt snowball method can be very empowering. You’ll feel like you’re gaining control of your financial health (because you are)! This can help eliminate money fears and anxiety, bringing you peace of mind.
The psychological benefit is one of the biggest assets of the snowball approach, but the method does have drawbacks. For example, by prioritizing the smallest debts instead of those with the highest total interest, you’ll allow your high-interest debts to grow and might end up paying a larger total amount back to lenders. This can also mean that it will take longer to become debt-free.
That said, when it comes to paying off debts, the key to success is finding a strategy that works for you. Compared to the debt snowball method, other approaches — like the debt avalanche method, which tackles high-interest debt first — may make more sense from a numbers standpoint.
Although you’ll be paying off debts with the highest interest rates first using the avalanche method, presumably paying less in the big picture, getting debt-freeisn’t just a numbers game. It’s also a psychological game — and that’s where the debt snowball method gains big points.
Real life example of debt mismanagement
Meet Ashley and Brandon, a couple drowning in debt and yet surrounded by toys—trucks, snowmobiles, four-wheelers, you name it.
They’re facing some heavy financial decisions, especially when it comes to starting a family, and it’s clear that money is at the heart of their struggles.
The biggest issue is that Brandon can’t give up his toys.
[00:04:15] Ashley: Right now our goal is getting out of debt. I brought up the idea of selling a vehicle that is not a necessity. It’s Brandon’s truck, and it wasn’t an argument necessarily, but just isn’t something that we agree on because he doesn’t want to sell it.
[00:04:35] Ramit: Okay, paint the picture for me.
[00:04:37] Ashley: I work from home, so if I need a vehicle, I will get up in the morning and I will drive you to work and then I will have the vehicle for the day and I will go pick you up. And I tried to problem solve needing two vehicles. He did not feel comfortable selling it.
[00:04:53] Ramit: What’d he say?
[00:04:55] Ashley: He had reasons why, because we have a boat that we don’t use.
[00:05:00] Ramit: What? You have a truck and a boat? Okay, go on.
[00:05:06] Ashley: A boat sounds fancy. It’s not, and he does do some woodworking, builds garden boxes, and when he delivers them, he needs the truck to deliver them. And he just likes the truck. If he wants to haul his snowmobile, he can’t haul a snowmobile without the truck. If he wants to haul his four-wheeler, he can’t haul his four-wheeler without the truck.
[00:05:30] Ramit: Is this a joke?
[00:05:32] Ashley: No.
[00:05:34] Brandon: No.
[00:05:34] Ramit: All right. We might as well just get a full inventory of all the stuff you own. So you have a truck, a snowmobile, a four-wheeler, a boat, what else?
[00:05:43] Brandon: A pit bike.
[00:05:45] Ramit: What? What is that? Oh, like one of those bikes that goes on the dirt?
[00:05:48] Brandon: Yeah, it’s like a dirt bike, but it’s a smaller version.
[00:05:53] Ramit: Okay. All right. Go on. So you suggested the gentle idea of perhaps selling the truck and then he said what?
[00:06:01] Ashley: And it was always like, yeah, I don’t think I want to sell it, and that’s still where we’re at with it.
[00:06:10] Ramit: All right. Brandon, what do you remember about that conversation?
[00:06:15] Brandon: She asked to sell it and I gave her the reasons why I didn’t want to, and I enjoy having the truck for when I do need it.
Meanwhile, Ashley does everything she can to ensure their financial future, and for the benefit of their future family. At first, it seemed that Brandon wasn’t taking it as seriously.
[00:07:42] Ramit: So the primary challenge that you’re both facing is you have debt, and you disagree about how aggressively to pay it off. Is that right?
[00:07:52] Brandon: Yeah.
[00:07:53] Ramit: All right, Ashley, you want to pay it off what?
[00:07:55] Ashley: As aggressively as possible. So right now we’re paying way over what our minimum payments are to try and get especially the credit card debt paid off as soon as we can. That’s been my main focus because the interest rate is so high. And then after that, I have kind debt payoff schedule that’s snowballing all of the payments.
[00:08:23] Ramit: Okay. And Brandon?
[00:08:25] Brandon: I was more of minimum payments just so we weren’t strapped.
[00:08:30] Ramit: Okay. Do you know how much you spend per year?
[00:08:34] Brandon: I don’t know.
[00:08:35] Ashley: I think we spend more than we need to, so I know that we could be putting more towards it. But I know that Brandon has expressed not wanting to stop living and stop having some of the luxuries of life to pay off the debt that we’ve accumulated.
[00:08:58] Ramit: Mm-hmm.
[00:09:00] Ashley: So I’m trying to find some balance between those two things.
[00:09:04] Ramit: Okay. Why are you the one finding the balance, Ashley, out of curiosity?
[00:09:10] Ashley: He doesn’t really have or doesn’t seem to have any interest in figuring out the financial piece of it.
On top of that, they were trying to grow their family, which isn’t cheap. They gathered a lot of debt on a surrogate, and things didn’t work out as well as they hoped.
[00:35:47] Ashley: We took out another loan to pay for a surrogate. But our credit wasn’t great, so our interest rate is high. And we went through the whole process, and we had a surrogate. We went through everything. She ended up pregnant and we lost it. And we went through IVF with her and the transfer didn’t work. And then the money was gone, and there was no baby. So we’re paying that loan, and we have no baby. I don’t want to say I regret it, but we really were motivated to start a family.
[00:36:23] Ramit: So I understand that you’re thinking about starting a family. What’s the financial considerations there?
[00:36:30] Ashley: It’s expensive. That is a large portion of our debt right now.
[00:36:40] Brandon: Yeah.
[00:36:40] Ashley: We were using a surrogate and we had to take out a loan for it. It didn’t work. So we have a loan that we’re paying and obviously nothing to show for it. So for me, that is a big motivator to get our debt paid off.
[00:37:00] Ramit: Mm. So are you thinking of after you pay off debt, potentially engaging with another surrogate?
[00:37:08] Ashley: Yeah.
[00:37:09] Ramit: Okay. And how much would that cost?
[00:37:13] Ashley: It’s probably going to cost at least $20,000, somewhere between 20 and $40,000.
[00:37:20] Ramit: Okay. All right. So understand, and that is just a really expensive, emotionally difficult process. I’m sorry you had to go through what you’ve already gone through. That’s tough.
Fortunately, for the sake of their future and their family, Brandon finally realizes how much money they would have later on in life, if he was just a little more disciplined right now.
[00:55:39] This debt is killing you. That’s why it’s driving me insane when we’re sitting here agonizing over simple decisions. Because I see what’s possible for you. More than even you see it. $2,000 a month, just to give you a sense of how much that turns into. I know this isn’t even going to seem real, but I’m just going to show you anyway.
[00:56:02] Ashley: I think that’s important because I don’t think he realizes either what that would turn into investing it because I would love to retire early and be able to experience life later together too.
[00:56:16] Ramit: Mm-hmm. So if we just take some basic numbers here, you have $43,000 invested. Let’s say you put in 24,000 a year, which is very realistic after you pay off your debt, extremely realistic. You could actually put in more than that. Right there, that’s worth $4 million by the time you’re 65. That’s a lot of freaking money. Let’s make it 30. Let’s say it takes you a few years to pay off your debt. You’re still talking about 2.7 to $3 million. Now, Brandon, when I say that number, what goes through your head?
[00:56:53] Brandon: That’s a lot of money.
[00:56:54] Ramit: What else?
[00:56:59] Brandon: We could be living life a lot different.
[00:57:02] Ramit: Like what?
[00:57:03] Brandon: Traveling. I know Ashley really wants to do a lot more traveling. And we could take a lot more trips and go on fishing or snowmobile trips or whatever.
By the end of our conversation, we see Brandon finally wake up to just how serious their situation is. There’s a glimmer of hope as he starts to grasp what needs to be done to tackle their debt head-on.
[00:57:28] Ashley: I feel like his whole face changed.
[00:57:29] Ramit: What the fuck is going on right now, Brandon? Tell me.
[00:57:32] Brandon: I saw the numbers and what they could be.
[00:57:36] Ramit: And then what happened?
[00:57:38] Brandon: That changed how I feel on getting this debt paid off.
[00:57:43] Ramit: Tell me now. What do you want to do?
[00:57:45] Brandon: Sell it.
[00:57:47] Ramit: Sell what? Tell me.
[00:57:48] Brandon: Everything.
[00:57:49] Ramit: Yes. Right now, it’s just you have this huge cloud over you, and everything you do is about the debt. Can we eat this thing at the grocery store? What about our debt? Let’s dream. We can’t because we have debt. It’s all debt all day. And yet, neither of you wants to do the things that are going to get you out of debt. I can’t do it for you, but you can.
One of the big advantages of the snowball method is that it tackles the emotional side of debt. Let’s be real—debt can feel crushing, especially when it’s affecting every little decision you make. But if you focus on knocking out one debt at a time with the snowball method, you’ll see progress faster and feel motivated to clear up all your debt.
Listen to the episode to find out exactly how Ashley and Brandon got stuck with so much debt in the first place, and how we mapped out some solutions together.
Your financial future begins with you
Paying off your debt quickly gives you the freedom to put your money to better use. Once you’re out of debt, you can start investing to grow your wealth and make your money work for you. Or, you can allocate some of that extra money toward guilt-free spending—just like I outline in my Conscious Spending Plan.
When you’re not weighed down by debt, you can truly focus on building your Rich Life, where you can spend on the things you love without guilt or stress. By eliminating debt, you open up opportunities to invest in your future, enjoy your present, and live the life you’ve always wanted.
Whatever path you choose, eliminating debt is one valuable component of improving your money management and overall financial health. A holistic approach to greater financial freedom also involves investing your money to make it work for you and earning more, ideally through diverse income streams. You can find out how it all works by reading my NYT bestselling book, “I Will Teach You to Be Rich”.
