“The debt snowball method completely ignores interest rates.”
Here’s how the debt snowball method works
Debt snowball method example
Let’s say you had three different debts that you want to pay off. In the debt snowball method, you will list these from smallest to largest according to total debt. Even if the minimum payment or interest rate is out of order, fixate only on the total debt. Take a look at this example:
|DEBT NAME||TOTAL DEBT||MINIMUM PAYMENT|
Automate minimum payments on everything except the smallest loan.
Once you have the first debt paid off, you will add that payment towards the minimum payment of the next smallest debt. This is your new payment amount. For example, if you ended up throwing $400 towards Sallie Mae and paid it off, you would take $400 plus the minimum payment of $157 with the car loan and will now pay $557 towards the car each month until it is paid off. Driving a paid for car is waaayyy different than with a lien. It just drives better. Trust me, guys.
Why The Debt Snowball Method Works
The debt snowball method is effective because it takes instant gratification into account. We are motivated by quick wins. When you pay off a $2,000 loan in a matter of three months, you feel incredibly empowered and in control. It motivates you to move on to the next loan with an even bigger desire to crush it as quickly as possible.
I know what you’re thinking.
“But Justine, the debt snowball method doesn’t save you as much interest in the long run. Mathematically speaking, paying off the highest interest rate first is much better.”
Well, mathematically speaking, we wouldn’t be having this conversation had you decided to borrow at 8.7% interest.
If you are paying off debt from the smallest loan to the largest, you need to forget about the math and forget about the interest. This strategy is all about mindset. Instead of sprinkling your debt payments evenly across all your debts, you are going to solely focus on the smallest debt. When you become so fixated on the end goal, the debt snowball method can be incredibly effective.
I used the debt snowball method to pay off $35,000
My debt free journey started in 2012 with $35,000 in student loan debt (more on that story here). If I was going to overcome my debt, I knew I had to be mentally motivated to pay it off fast. My very first debt was actually to my cousin who lended me $3,000 to study abroad in Australia. I automated all other payments except for hers and focused on paying her off as quickly as I could. In just three months, I ended up paying off $3,000 making $10 per hour!