Dave Ramsey’s Debt Snowball Debt Payment Method
If you’re a regular personal finance blog reader, chances are you’ve heard about Dave Ramsey and Debt Snowball. Personally, I have mentioned both Dave Ramsey and Debt Snowball a few times, but never write directly about it. In this article, I’d like to provide a brief introduction, an illustration, and links to related resources.
What Is Dave Ramsey’s Debt Snowball Method?
A Debt Snowball is a debt elimination strategy popularized by Dave Ramsey, a renowned debt and personal finance guru. Under this method, you reduce your debt by paying the minimum monthly payment to all debts, except the one with the smallest balance, which you’ll try to pay down as fast as you can.
The basic steps in the Debt Snowball debt reduction plan are as follows:
- List all debts from smallest balance to largest. Note, there are people (including me) that advocates paying highest interest rate debt first, but that’s not the Debt Snowball method.
- Pay the minimum payment on every debt, except the smallest debt.
- Pay as much as you can towards that smallest debt until it is paid off.
- Once the smallest debt is paid in full, repeat the process by paying as much as you can toward the second smallest debt.
The idea is that you’ll be able to pay more toward the “smallest” debt each time a debt is fully paid off.
How Does Dave Ramsey’s Debt Snowball Work?
Let’s say you have 5 outstanding debts in the following amount: $500, $625, $675, $1000, and $1200 — note, the interest rate is irrelevant. To keep this simple, let’s assume each debt requires a minimum payment of $25 per month, and ignore the increases in amount owed due to finance charges. Also, let’s assume you’ve budgeted $200 per months to pay off your debt.
The first month, you’ll pay $25 to all debts, except the $500 debt, which you’ll pay all of the remaining $100 budgeted. After 5 months, the $500 debt would be fully paid and the remaining debts are reduced to: $500, $550, $875, and $1075.
Now, you’ll repeat the same process by paying $25 to all debts, except the $475 debt, which you’ll pay $125 per month ($100 from the $500 debt that was paid off, plus the $25 you originally paid). After 4 months, the second $500 debt is paid off (notice how it’s faster than the first $500), and the remaining debts are reduced to: $450, $775, and $975.
Rinse and repeat…
An Illustration Of The Debt Snowball
Here’s the example in a table format to help you visualize the process.
Debt Snowball Variations
There are many variations of the Debt Snowball methods, i.e., Debt Snowflake, Debt Avalanche, Debt Deluge, etc.
I first heard about Debt Snowflake from Paidtwice. Debt Snowflake is debt reduction plan based on Debt Snowball, but the idea is to actively find and use additional income to pay even more than the budgeted amount toward your top priority debt.
The concept of Debt Avalanche is not new, but I believe the term is first used at Consumerism Commentary. Debt Avalanche is similar to Debt Snowball, but the idea is to pay off the highest interest debt first
Other Debt Snowball Variations
Supercharging the Debt Snowball at Plonkee Money
Debt Deluge – Modified Debt Snowball at No Credit Needed
Alternate Debt Snowball Theory: How Annoyed Are You? at Poorer Than You
Debt Snowball Calculator
Also, here are two very nice debt reduction calculators to help you decide which method is best — i.e., smallest balance or highest interest rate first.