The Good, The Bad, and the Ugly Side of the Snowball Method for Paying Off Debt
There are lots of methods for eliminating debt. The most popular method is the Snowball Method which was given its notoriety by Dave Ramsey. Although it may be popular, it may not be the most effective, so let’s talk about why.
What is the Snowball Method?
The Snowball Method is a debt elimination method where you pay off your debts from the smallest amount owed to the largest amount owed.
How does it work?
There are four easy steps to this method.
First, you will need to list your debts from smallest to largest without taking into account the interest rates.
Next, you will begin making the minimum payment on all your debts. However, this will not apply to your smallest debt.
Instead, you will be paying as much as you can on your smallest debt until it is paid in full.
You’ll want to keep doing this until all of your debt is paid off.
*Literally taken from Dave Ramsey’s website*
Why is this problematic?
It literally ignores one of the most important factors in debt: INTEREST. Interest is “a charge for borrowed money generally a percentage of the amount borrowed”. How does this affect your overall debt? Well, in the long run, a debt with higher interest will cost you more money over time than a debt with a lower interest rate. By ignoring interest, the snowball method fails to consider the total cost of debt over time.
So what is the best method for eliminating debt?
There are a few other methods I have come across for debt elimination. A few are
The Avalanche Method- This is paying off debts with the highest interest first.
Balance Transfers - this moving your debt from one account with a higher interest rate to an account with a lower interest rate.
Personal Loan - This is where you take a personal loan (which is a form of debt) with a lower interest to pay off a debt with a higher interest rate
Debt Settlement - This is an agreement made between the company that owns your debt and you where the lender agrees to accept full payment on the loan, typically at a lower amount to end the relationship.
Bankruptcy- Bankruptcy is a legal process in which a court assesses the liabilities and assets of an individual and makes a decision to dismiss their debt.
If you have any questions about debt elimination, feel free to reach out and comment below! If you like what you read, sign up for my newsletter so you are first to know when new financial blogs are posted!
Until next time :)