The Snowball Method of Debt Reduction

From a mathematical standpoint, the snowball method of removing debt, made popular by financial expert Dave Ramsey, doesn't always stand up. However, if you are having trouble plowing through debt, the snowball plan can give you the strategy and means to start seeing results in your bottom line.

Snowball Plan

The debt snowball plan, according to Dave Ramsey, involves the principle of paying only the minimum balances on all of your debts and focusing on one debt at a time. The idea is sound --- by concentrating your efforts on one account at a time, you will be placing an emphasis on eliminating complete balances, rather than chipping away a little at a time at a multitude of targets. The other part of this plan is to add extra cash to the account you are tackling, based on your budget. The concept is to apply those small payments you have been making over the minimum payments on the other accounts and combine them into a single payment, drawing down equity in your "target" account each month, thereby speeding up the process of paying off the target account.

Mathematics

While the concept sounds good in theory, the mathematics does not always hold up in practice. Dave Ramsey advises clients not to worry about interest rates of their debts but instead focus on the balances. To Ramsey, finding "financial freedom" is mainly psychological and, by paying off the smallest balances first, you are finding small successes, and, in the long run, you will be more likely to stick with the plan. However, mathematically, the plan does not allow for the greatest amount of savings. Ideally, you would pay off the balance with the highest interest rate first, avoiding interest charges, and, in the long run, realize the most savings. According to Ramsey, while the snowball plan doesn't earn you the most savings, you will get better results in the long term.

Following the Plan

To follow the snowball debt plan, you will need to organize your finances. Organizing your finances could in fact be the most powerful aspect of this plan. You'll need to list all of your debts, with minimum monthly payment, interest rate and balance due. Organize your balances from least to greatest in balance amount and target a "snowball" payment, a payment greater than the minimum. Once you have paid off the first debt, you move on to the next and down the line until you are debt-free.

Making the Plan Work

To make the debt snowball plan work, you must stay consistent and follow the plan, according to Cash Money Life. The snowball plan will buy you some quick victories. By applying just a few dollars over the minimum, you can pay smaller bills off in a matter of a few months. However, you can become bogged down in the plan as you move on to the bigger bills. If you have debt in the tens of thousands of dollars, you might take over five years to pay down the debt and could be tempted to fall back into old habits. Obviously, if you can afford to apply more to your "snowball" payment, your debt will drop quicker. For many people in debt, the minimum is sometimes too much. The debt snowball plan takes commitment and perseverance. Continue building momentum and don't stray off course and, while the progress might be slow, your debt will decrease.