Paying off debt can be overwhelming and it is no easy task. But doing so will help provide so much relief by eliminating that heavy burden. And, it’s a critical step towards financial peace of mind, and ultimately financial independence.
The Debt Snowball Method is a debt elimination strategy. It’s a simple, yet effective approach to getting out of debt popularized by Dave Ramsey, a renowned personal finance guru. Dave has helped thousands of people get out of debt using this method and it will help you too!
It focuses less on math and more on behavioral changes. For more on the theory of why your brain will like the debt snowball method, click here.
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Why is it called the Debt Snowball?
The process is named the “snowball” method because the payments you are sending to creditors grow larger over time, much like a rolling snowball.
Imagine making a snowman as a kid. You start with a snowball and then roll the snowball around the yard. It starts out small, but with each rotation, it adds a layer of snow, getting bigger and bigger, as it accumulates more snow. Eventually, your snowball looks more like a boulder than a snowball.
How the Debt Snowball Method works
With the debt snowball method, you pay off debt in order of smallest to largest, regardless of interest rate. You make minimum payments on everything but the smallest debt and attack that one with a vengeance. When that bill is paid, you move to the next smallest and repeat until you plow through all of your debt.
Step 1: List all of your debts from smallest to largest. Write them down. (For an idea of how to setup your list, see below).
Step 2: Pay the minimum payment on every debt, except the smallest debt.
Step 3: Pay as much as you can towards that smallest debt until it is paid off.
Step 4: Repeat the process by paying as much as you can toward the next smallest debt until each debt is paid in full.
Why use this method?
You gain a psychological momentum achieving quick wins. The advantage to using the debt snowball method is that you see instant progress and will be able to pay off a debt completely in only a few months.
Personal finance is only 20% head knowledge. It’s 80% behavior!
Dave Ramsey
This approach is all about behavior modification. Be seeing results fast, you’re more likely to stick with the program and rid yourself of debt for good.
Why Does the Debt Snowball Method Work?
The debt snowball works because it’s all about behavior modification (not math).
This method is structured to help you achieve wins as quickly as possible since you’re making additional payments on your smallest debts first.
Neurotransmitters are chemicals that transmit between neurons or nerve cells. Dopamine, the “feel good” neurotransmitter, helps us focus and makes us feel happy when we meet our goals. By completing small goals rapidly, you are getting dopamine spikes more often. This makes you feel good, which, in turn, makes you want to repeat the behavior.
It also keeps you focused on your plan. Small victories matter.
Visually tracking your debt journey can also help you feel gratification because you SEE PROGRESS. So, write them down, setup your chart, and tack it to your fridge – “gamify” your debt pay-down!
Have questions? Please feel free to comment or email me. I’d love to hear from you!
Let’s develop some smart money habits together!
~SMJ