Debt Snowball, Slightly Modified

Many people swear by the “snowball” method of paying off debt.  It works — I won’t dispute it.  But there’s a slight modification that can help you pay off your debt even faster and will save you money.

The Classic Debt Snowball Method of Paying Off Debt

Assuming you can stop incurring new debt and you have

  • multiple debts,
  • enough income to make the minimum payments on all of your debts,
  • enough income for an additional payment,

then you can use the snowball method.

(If you don’t have enough income, you need to either earn more money, or sell some of your stuff, or both.)

Basically, the Debt Snowball method is paying off your loans from smallest to largest.  You make a list of all your debts.  Debt #1 is the debt with the smallest balance, debt #2 is the second smallest, debt #3 is the next smallest, and so on.  You make the minimum payments on all your debts and put as much money as you can muster towards additional payments on debt #1, the one with the smallest balance.

Once debt #1 is paid in full, you put as much money as you can towards debt #2, the second-smallest (or you could say that with the first debt gone, the second one is the new smallest debt).  Because you no longer owe anything on debt #1, what you used to pay for its minimum payment is now included in the additional payment on debt #2.

When debt #2 is paid off, you apply the minimum payments from #1 and #2 plus as much more as possible towards an additional payment on debt #3.  Thus, the “snowball” effect: As the smaller debts are wiped out, the amount being paid on current smallest debt gets bigger because it includes the amounts of the minimum payments that are no longer required on the paid-off debts.

Here’s an example:

Let’s assume Joe owes a total of $40,000 on 8 debts.  The minimum payments total $1,200 per month and Joe can pay an additional $400 each month.

His debts, arranged from smallest-to-largest by debt balance look like this.

Classic Debt Snowball Method
Debt Balance Minimum Monthly Payment
Medical Bill $1,000 $100
Credit Card V 3,500 80
Credit Card D 4,100 100
Student Loan 4,200 210
Credit Card A 4,500 90
Car 5,800 240
Home Equity Loan 7,400 100
Credit Card M 9,500 280
Total $40,000 $1,200

The Classic Snowball method is to take the $1,600 that he can apply to these debts each month and in the first month make the minimum payments on every debt (a total of $1,200) and make an additional $400 payment on the Medical Bill debt.

In the second month he does the same thing again.  Now the Medical Bill debt is paid off, because he’s paid $200 for the 2 minimum monthly payments plus $800 in additional payments.  (We’ll assume there’s no interest charges on this one.)

In the third month, he makes all of the minimum payments, which now total $1,100 because the Medical Bill is paid off.  This leaves $500 which he can apply as an additional payment to Credit Card V.  It will take several months to pay off Credit Card V at $580 per month, which is its monthly minimum plus the “snowball” of $500.  (See how the additional amount got bigger?  It was $400 per month at the beginning.  Now it has grown to $500.)

Once Credit Card V is paid off, Joe will continue to make the minimum payments on the remaining debts and will attack Credit Card D by paying $680 per month (the $100 minimum payment on Credit Card D, plus the $400 in additional payments he started with, plus the $100 that used to go to the Medical Bill, plus the $80 that used to go to Credit Card V).

In time, Credit Card D will be paid off and an even larger snowball will be applied to the next debt.

Part of the reason the snowball method works is psychology.  Nothing wrong with that, if it gets the job done!  Joe should make a table of debts like the one shown above and cross off each debt as it’s paid off:

 Medical Bill   $1,000   $100 
 Credit Card V   3,500   40 

2 down and 6 to go!

Seeing a red line crossed through the first debt, and then another, and eventually another, is psychologically motivating, no question about it.  It helps you keep going.  Especially because the first victory, the first debt to be paid off, will (probably) come quickly (assuming some debts are much smaller than others, as in the example above).  The more you’re motivated, the more you will strive to earn more, save more, pay off debt more, make the snowball bigger and bigger until the last debt is crossed off.  As the snowball gets bigger, the additional payments can be over $1,000 each month, which gives you a feeling of power and being in control.  Your days of debt slavery are ending.  You will begin to look forward to building your assets and increasing your net worth by using the same methods of frugality and economizing that you used to pay off debt.

So, what’s wrong with that?

Nothing.  It works.  If you works for you and gets you out of debt, that’s great.

However, there is a slightly modified version that can get you out of debt more quickly and for less money.  To use it, you just have to be able to derive your motivation from a different measure of indebtedness.

The Classic Debt Snowball Method motivates people by getting them to pay attention to their total number of debts.  In Joe’s case (above) he starts with 8 debts and sees that number quickly reduced to 7 and then 6.  These early victories are important.  It’s good to see progress.  But what if, instead of looking at the total number of debts, we looked at some other measure of indebtedness?

The Modified Debt Snowball Method of Paying Off Debt
(Total Debt and Average Interest Awareness)

Let’s add another column and re-arrange Joe’s table of debts.

Modified Debt Snowball Method
Debt Balance Minimum Monthly Payment Interest Rate (APR)
Credit Card M $9,500 $280 24%
Credit Card D 4,100 100 20
Credit Card V 3,500 80 15
Credit Card A 4,500 90 12
Car 5,800 240 9
Home Equity Loan 7,400 100 6
Student Loan 4,200 210 5
Medical Bill 1,000 100 0
Total $40,000 $1,200  –

Here are Joe’s debts, same as in the table above, but with a new column showing the interest rate (annual percentage rate) for each debt.  The table is now ordered by interest rate, from highest to lowest.  The debt to pay off first is the one with the highest interest rate, Credit Card M.

Joe will still pay the $1,200 in minimum payments each month, same as in the Classic Snowball method.  But the additional payment of $400 will be directed entirely at Credit Card M, because it has the highest interest rate.  The first victory won’t come as quickly as in the Classic Snowball Method; it will take 1 year and 5 months to entirely pay off Credit Card M by paying $680 per month (its minimum plus the additional payment of $400).

Once Credit Card M is paid off, Joe uses the snowball method on the debt with the second-highest interest rate, Credit Card D.  Paying D’s minimum monthly payment of $100, plus the additional $400 he started with, and the $280 that had been going to Card M, makes a total of $780 each month.  This will pay off Credit Card D in less than 6 months after M was paid off.  (It’s already been reduced a bit with the minimum payments that were made during the time Joe was concentrating on Credit Card M.)

After M and D are paid off, Joe can take on Credit Card V with monthly payments of $860.  It will be reduced to zero in another 4 months.

As you can see, it takes longer to pay off the first 2 debts using the Modified Snowball method — almost 2 years to completely eliminate the first 2 debts, compared with less than 1 year to pay off (the smaller first 2 debts) with the Classic Snowball method.  But because the Modified Method gets rid of the debts with the highest interest rate first, the time it will take to get to debt freedom day, when all the debts are paid off, will be shorter and the amount of money needed to pay off all of the debts (including accumulated interest) will be smaller.

Instead of concentrating on the total number of debts, as in the Classic Method, with the Modified Method you should look at the total amount of money you owe.  Seeing your total debt going down will be your motivation.

Getting those first 2 debts paid off with the Classic Method comes at a cost, namely the interest charges being added to the high-interest debts as only minimum payments are made.  If a credit card with a $9,500 balance at 24% interest requires a payment of $280 per month, that $280 breaks down to $190 to pay the interest charges for one month and a $90 reduction to the balance.  Over $2,000 in interest per year is added to a debt of that size at that rate.  Getting rid of the high-interest debt first while making minimum payments on debt with lower interest rates avoids a lot of interest charges and that means saving a lot of money.

In this example, if Joe uses the Classic Snowball method, after paying $1,600 per month for 12 months (a total of $19,200), his total debt will be reduced from $40,000 to $25,440.  At the same time his $19,200 was subtracted from the debt, $4,650 of interest charges were added.

If Joe uses the Modified Snowball method, after paying the same $1,600 per month for 12 months ($19,200 again), his debt will be reduced from $40,000 to $25,140.  As his payments of $19,200 were subtracted from the debt, $4,340 in interest were added.

In just the first year, using the Classic method costs $300 more (in interest that will eventually have to be paid in order to pay off the debt) than the Modified method.  The difference will be smaller subsequent years, but it will total hundreds of dollars over the time required to reach debt freedom day.  $300 might not seem like much, especially when compared to the total amount of debt.  But, the question is: Why not avoid hundreds of dollars of additional interest (which is additional debt), if you can do that by just allocating the same monthly payments a certain way?

Another measure you might like looking at is the weighted average interest rate on your total debt.  (The weighted average accounts for the fact that the balances for each interest rate are of varying sizes.  It is calculated by multiplying each debt’s balance by its interest rate, summing the products, then dividing the sum of the products by the total debt.)  In the example of the Classic Method above, the average interest rate actually increases as low-interest debt is paid off more before high-interest debt.  In the Modified method, the average interest rate steadily declines.

Classic Snowball or Modified Snowball?

It’s up to you to decide.

If all of your debts have more-or-less the same interest rates, there’s not much difference between the Classic Snowball and the Modified Snowball.  If your smallest debts are the ones with the highest interest rates, the two methods are the same.  If you can pay off all of your debts in less than a year or two, the difference in the amount of interest might not be much.

If you have debts with different interest rates (and especially if the small debts are the ones with the low interest rates) and you’re going to be paying them off over a long time, then you need to make a choice.

If you need to see some quick results, as in one debt gone and then another debt gone, then go ahead and use the Classic Snowball method.  If that’s what it takes to stay motivated, then the extra cost is worth it.  Some research has shown that people with lots of debt are more successful at paying them off if they use the Classic Snowball method.

On the other hand, if seeing your both your total debt and the average interest you’re being charged go down from month to month (and knowing that you’re avoiding addition interest as much as possible) is enough to keep you motivated, then the Modified Snowball might be right for you.

Whichever you choose, the most important thing is to keep yourself motivated.  Focus on getting rid of your debt.  Make tables or charts and tape them to your refrigerator.  Do everything you can to make your additional payments snowball even bigger.  If you receive a raise at work, work extra hours, get a part-time job, cultivate a side hustle, or perform extra-intensive economizing (like oatmeal for breakfast, hard-boiled eggs for lunch, and rice-and-beans for dinner 6 or 7 days a week, use the proceeds to knock down more of your debt.

The most important thing, no matter which method you choose, is to commit to doing everything you can to get out of debt!  Making the snowball as big as possible, by putting as much money as possible into your additional payment is the most important thing.

Postscript: How to Calculate a Weighted Average Interest Rate

If all your debts are the same size (say you have three credit cards and the balances on all of them are the same, say $1,000 on credit card A, $1,000 on credit card B, and $1,000 on credit card C), then you can compute the average interest rate the easy way.  Sum the interest rates and divide by the number of debts.  If the interest rates are 9%, 15%, and 18%, then the average interest rate is (9 + 15 + 18) ÷ 3 = 14%.

But if the the balances aren’t the same (if, for example, it’s $200 on credit card A, $2,000 on credit card B, and $7000 on credit card C), then the summing the balances and dividing by the number of debts isn’t going to be correct.

Using the balances and interest rates from the example of Joe’s $40,000 of debt (above), here’s an example of how to calculate the weighted average of multiple debts.

First, multiply the balance of each debt by its interest rate, as shown in the table below.

Calculating the Weighted Average Interest Rate of Multiple Debts
Balance Interest Rate (APR) Balance × Interest Rate
9,500 24 228,000
4,100 20 82,000
3,500 15 52,500
4,500 12 54,000
5,800 9 52,200
7,400 6 44,400
4,200 5 21,000
1,000 0 0
Total           40,000  – 534,100

Then, sum the balances and the balance × interest rate products to get the totals. Total balance = 40,000 and total balance × interest = 534,100.

Divide the balance × interest rate total by the total of the balances:

534,100 ÷ 40,000 = 13.35

The weighted average interest rate is 13.35%.


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