Does the debt snowball work?

Story: Jenn Chonillo

Getting out of debt is never easy, but it is possible.

Debt can be a tool that savvy consumers use to gain frequent-flyer points with their credit card reward programs or to improve their credit score to buy a home. However, the other side of debt becomes a shackle to many individuals and families. Credit cards and student loans that once brought opportunity can strangle the monthly budget with no sign of stopping until they decide to get rid of debt. Though debt reduction is difficult, there is a method that’s effective but often avoided because people are uncertain of its effectiveness. It’s the snowball method.

What is a debt snowball?

The debt snowball is a five-step method of debt reduction.

• Step 1: List all debt in order from smallest balance to largest.
• Step 2: Pay the minimum payment on all the debts from smallest to largest.
• Step 3: After paying all other monthly necessities (food, clothing, etc.), take the remainder and apply it to the smallest debt until it’s paid off.
• Step 4: As you pay off each small debt, apply the minimum payment and all extra money toward paying off the next smallest debt.
• Step 5: Repeat the steps until you are debt-free.

For many people in debt, this is one of the easiest ways to get out of debt. This makes it so simple the entire family, including the children, can work together to pay off the debts.

Why the debt snowball works

The reason the debt snowball works well for many families is because it is based on human psychology. Everyone enjoys seeing progress. By having small goals, you see progress made quickly. This allows families to make the necessary changes to increase their intensity toward their ultimate goal.

Why the debt snowball doesn’t work

Unfortunately, this simple program of debt reduction does have problems. Many financial gurus believe contributions to retirement and college savings programs should halt while reducing debt. For those opposed to the snowball method, the loss of the interest in a retirement plan is enough of a detriment that they oppose the method entirely. However, many experts state that contributions should stop only for the first two years. Others dislike the debt snowball because they believe families should focus on paying off high-interest debts before small debts.

What experts say about debt
snowball plans Fortunately, both the Harvard Business Review and Northwestern’s Kellogg School of Management researched the snowball method. Both well-respected schools came to the same conclusion—the snowball was best for consumers. They found people who used the snowball method were more likely to become debt-free. Researchers believed small accomplishments help them continue toward their goal.

If you’re looking to get out of debt, consider trying the debt snowball. It could be the way you finally become debt-free.