Paying off Debt: The Debt Snowball Method

Paying off Debt: The Debt Snowball Method

The debt snowball method is used by paying off debt accounts that have lower balances first. Once an account has been paid off, that frees up some money next month, which you then take an apply towards your debt account with the next lowest balance. This can be emphasized when you are making minimum payments towards each account, and then one of your account gets paid off completely, freeing up that cash.

The debt snowball method is best used when your account have the same interest rate.

The Debt Snowball Method

To illustrate, we will use the same table from the debt avalanche example.

Account Balance Interest Rate
Credit Card 1 2000 7%
Credit Card 2 5000 19%
Car Loan 15000 4%
Student Loan 10000 6%

In this table, you will rearrange your accounts and pay it off in the following order:

Account Balance Interest Rate
Credit Card 1 2000 7%
Credit Card 2 5000 19%
Student Loan 10000 6%
Car Loan 15000 4%

Imagine you’re putting $500 a month towards credit card #1 and the minimum payments towards your other loans. As soon as credit card #1 is paid off, you know have $500 free each month. According to the snowball method, you will take this extra $500 and apply it towards your next lowest balance, which is credit card #2. When credit card #2 is paid off, you take the extra money you get from credit card #1 and credit card #2 and apply towards your student loans, and so forth.

The debt snowball method is best used when you have multiple accounts with the same interest rate. It helps you resolve your outstanding accounts faster and brings you closer to debt-freedom.

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