Paying down your debt is hard. When you’re up to your eyeballs in bills, it can be completely demoralizing to think about paying off a loan or trying to save any extra money for the future. Where should you even start when it comes to choosing which debt to tackle first?
This is where the concept of snowballing your debt comes in. If you haven’t heard of it, the debt snowball method is a way to pay down your bills that lets you focus on just one debt at a time. — typically the smallest one. To make it happen, you pay the minimum on all your debts except one, at which you throw all the spare cash you can to get ahead of the game. When that first debt is paid off, you take the monthly payment you had been spending to get rid of it and apply it — plus any extra money you can manage — to the next bill.
Rinse and repeat until you have paid off all your debt.
The main advantage of this system is that it keeps you organized because you can focus your efforts on one debt at a time instead of trying to spread your money over all of them or sticking to a complicated rotating scheme of payments. It’s also really good for morale to get rid of an easy, small debt first — and then you automatically have some extra money to put towards another bill, all without a major budget cut or picking up a side gig.
But does this method make the most financial sense? Or would you be better off starting with your biggest debt instead? How does the interest rate factor in?
Time to crunch the numbers.
Hypothetical Debtor: Suzie Spendthrift
For the sake of looking at the math, we’re going to start with Suzie Spendthrift, who has three major debts to get rid of. Here’s what she owes:
Debt A: $5,000
Debt B: $2,000
Debt C: $500
For this comparison, let’s assume that the interest rates on these debts are equal at 5%, and that Suzie is able to spend $50 extra each month to get rid of her debt. We’ll also assume her minimum payment on each loan is $50.
Total Amount Owed: Start Big or Small?
If Suzie begins by focusing on her smallest debt first, paying the $50 minimum and an extra $50 each month, she will pay off Debt A in only 6 months. (You can follow along with the math by entering the values in a line of credit payoff calculator.)
Now Suzie has an extra $100 per month (her original extra $50 plus the $50 minimum she no longer has to spend on Debt A) to put toward Debt B. Added to the minimum payment of $50 on Debt B, that means she can put $150 per month onto this bill. This bill has been reduced by $50 per month for the six months that she has been paying off Debt A, though, so she only has $1,747 to go when you add in her interest charges. Doing this allows her to pay off Debt B in 12 months.