The Debt Snowball is arguably the most important of the Baby Steps as it not only clears your debt, it changes your attitude towards money.
Baby Step 2 (BS2) is to work on your Debt Snowball
The Debt Snowball is a technique to reduce your debt that works by your paying off your debts smallest to largest (regardless of the interest rate), this may seem a bit counter-intuitive to some people but it’s about changing your attitude to money more than it’s about the math. You didn’t care about the interest rate when you took on the debt so why care about it now, just get it paid off.
What is snowballing?
We all know how to build a snowball – you start by packing some snow together tightly between your hands and then gradually add more to make it a bit bigger. Once it’s nice and sturdy you can actually start rolling it through the snow so that it picks up more and gets bigger with each roll.
It’s a bit of an odd analogy but imagine the snow as being the payments you are making towards your debt, each time you have a bit of extra money you add it to the amount you are paying off each month, after a while you finish paying off that first debt so you take that ‘snow’ (those regular payments) and put it towards paying off the next debt in your snowball.
Don’t like analogies? Ok, lets put it in an easy step by step for you
Debt Snowball Steps
- Make a list of all your consumer debts, order them smallest balance to largest balance.
- Make sure that you are paying the minimum payment on each one of your debts except from the smallest one – that’s the start of our snowball and we’re going to chuck as much ‘snow ‘ at it as we possibly can!
- Pay as much as possible towards your smallest debt. So that’s the minimum plus any extra you can find in your budget, from selling items, down the back of the sofa – literally any money you can find, we want that debt gone fast!
- Once you’ve paid off that first debt we take the money we were paying towards that and start throwing that at the next smallest!
- We keep going and repeating these steps until the debt snowball is complete.
Why Does the Debt Snowball Method Work?
The debt snowball method works so well because it isn’t necessarily about the maths of the problem, it’s about your attitude and behaviour towards it. By breaking it down into smaller and easier chunks you gain momentum quicker and start seeing little wins – little wins make us happy and get us chasing after the bigger wins and paying off those bigger debts.
Let’s look at it like this- if you start paying off a large debt first, let’s say you’ve got a large car finance loan because it’s such a large number to start with you won’t see any real traction with it for a while.
Whereas if we start with the smallest debt first you might find you can clear that within a few weeks or months and then suddenly that’s one debt out of your life FOREVER and you’re raring to tackle the next one.
By the time you get to paying off your bigger debts, you’ll have much more cash freed up from not having to pay on those other debts that you\ll be able to through a literal snow boulder at the debt.
It’s all about building momentum and seeing results, those quick wins get you started but the realisation that you can actually get out of debt keeps you going.
When you see a plan working you’re more likely to stick with it, the debt snowball might seem counter-intuitive but it WORKS because it changes your mindset about debt and your ability to be able to get yourself out of it.
My favourite Debt Snowball Tools
Undebt.it – This website is by far my favourite Debt Snowball Calculator (I’m a bit of a numbers nerd) as it also lets you add ‘snowflake’ payments if you come into an unexpected chunk of money that isn’t part of your normal monthly payments. It can look a little complicated at first as there are a few boxes to fill out to make sure it has all the info needed to work out your snowball but this link explains exactly How Undebt.it works and walks you through the process of setting up an account in a step by step manner. It’s all fully secure and doesn’t need access to any of your accounts, you input the data manually.
What’s The Cost – This is just a general all-round handy website to know about, it’s a pretty basic site but it has various calculators for financial products. I know a lot of people on the Dave Ramsey UK Based Support Group like this one.
Online Trading Academy – I’ve had a play around with this one in the past and it’s nice and easy to use it also creates some graphs to show your pay down rate which can be helpful if you are more visually motivated.
Pigly – I love the Pigly site, they have so many handy calculators and tools available to run numbers on things such as the Debt Snowball vs Debt Avalance method, savings goal calculators. Being able to do the calculations quickly and tweak things can really help you to get your head around the numbers quicker.
I didn’t know about those websites, they seem really useful for people to get a better picture of their debt and how it’s going to get paid off. Thanks for the clear explanation of DR’s baby steps – really helpful to explain why this way works. It didn’t make sense to me before.
Thank you I’m glad you found it useful!
I get the snowball method and it’s psychology but I really think you should focus on paying off the debt with the highest interest rate first…this will save you money in the long run. This is more of a Martin Lewis approach. And my approach to paying off my 16k.
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Seems like great advice for clearing debt. One question…I can see the logic for clearing smaller debts psychologically, but what if the smallest debts are interest free, with only the largest debt incurring interest? In this scenario, is it not better to maximise the interest free period and using any excess cash for the interest-bearing debt (adding the payments from the interest free debts when they are cleared)? Ok, two questions…! Thanks.
It’s personal preference and I know a lot of people would choose to do as you say BUT if you were asking Dave Ramsey he would say along the lines of ‘you didn’t care about the math/interest when you took the debt out so why do you care now’