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If you’ve found yourself facing various debts, it’s easy - and completely normal - to feel overwhelmed. Where do you even begin on your journey toward debt-free living?

The debt snowball method is here to help. Simple and speedy, this debt pay-down strategy can deliver a much-needed sense of accomplishment as you watch your debts disappear one by one. Now that’s something to smile about.

What Is the Debt Snowball Method?

Popularized by personal finance guru Dave Ramsey, the debt snowball method of repayment focuses on paying off small balances first. Here’s how it works. Say your debts are:

  • Credit card 1: $325 balance ($30 minimum payment)
  • Store credit card: $1,500 balance ($48 minimum payment)
  • Credit card 2: $3,500 balance ($77 minimum payment)
  • Car loan: $9,000 balance ($145 minimum payment)

Each month, you’d make the minimum monthly payment on every debt except the credit card with the $325 balance. For that credit card, you’ll put as much money as you can toward it until it’s paid in full and then roll that same amount - on top of the minimum payment - into the next smallest debt, in this case your store credit card with a $1,500 balance. You’ll keep doing this until you knock out your debts, one by one, from the smallest balance to the highest.

How Can I Use This Debt Pay-Down Method?

Here’s a simple method of getting yourself moving on “snowballing” your debts:

  1. Make a list of all your debts in order of balance, from lowest to highest.
  2. Next to each debt, be sure to note the minimum monthly payment.
  3. Calculate your cash available once you’ve met your monthly living expenses - rent/mortgage, utilities, insurance, food and so on.

Now, with your cash available, be sure to stash a few dollars a month away into savings. A good rule of thumb is to hold off on using the debt snowball method until you have at least $1,000 in an emergency savings account. Once you have that, you can work towards the recommended 6 months in take-home pay in emergency savings while working on paying off your debt.

Once you’re ready, use your extra cash to make the minimum monthly payments on all of your debts except your smallest balance. With the money left over, make an extra payment towards that smallest balance.

Here’s a working example:

  • Monthly take-home pay, after taxes: $2,700
  • Rent: $800
  • Necessary expenses: $400
  • Minimum payments on all debts: $300

Adding up to $1,500, the total expenditures in this, admittedly ideal, scenario leaves $1,200 each month to put toward savings and debt.

Start by putting an extra $200 in savings so you’re contributing to your emergency fund. Next, pay off that small credit card balance of $325. Then, in the following months, you can roll that extra $325 towards your store credit card, paying that off in five months. And so on.

What Are the Pros and Cons of Using the Debt Snowball Method?

The most important part of any debt pay-down strategy is making sure you have money going both into savings and toward paying off your debts. At the same time, you also want to make sure that you’re living a comfortable lifestyle and aren’t unnecessarily depriving yourself for your savings. A proper balance is key.

The main pro to this method for paying down debt are psychological. When you see whole debts disappear one by one, it’s enough to put a smile on your face! You’ll also be changing your behavior for the long term, focusing on those debt payoff finish lines instead of rising balances.

The biggest con to this method is that it doesn’t take interest rates into account. This means that higher debts with higher interest rates will still accumulate interest while you pay off smaller, potentially lower interest rate balances. Here’s a comparison of the difference in interest you might pay. Use this calculator if you want to focus on paying off debt with higher interest.

The good news is that the debt snowball method gives you a solid, actionable place to begin paying off your debts. Getting started is the most important part of the journey.

This information and recommendations contained herein is compiled from sources deemed reliable, but is not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent or is offering any tax, accounting, or legal advice.

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