Debt can easily snowball out of control. With Americans owing more than a trillion dollars in credit card debt, an unexpected medical bill, a car repair or utility bill can be overwhelming.
But there’s one strategy that can help consumers take control of their finances — by celebrating the small wins. And it begins with starting small.
It’s called the “snowball method.” It works by paying off the smallest debts first, then moving up to the bigger balances.
“The idea is that maybe you pay off that $500 store credit card bill, and then you’re more motivated to take on the $1,000 debt or the $2,000 debt,” said Ted Rossman from Bankrate.
He explains this payoff method is all about creating a goal and sticking to it.
“It’s kind of like if somebody goes on a diet or they want to hit the gym after New Year’s — you need to get in that habit,” Rossman said. “If the snowball helps you get in the habit of paying off these debts, even if it may not be the mathematical right answer, it might be the right answer for you from a motivational standpoint.”
To start, make a list of all credit card balances from lowest to highest. Then, start making the minimum payment on all balances, except for the smallest one. That’s the debt that one will want to make extra payments towards.
“The biggest benefit of the debt snowball is the quick win,” said Rossman. “And the fact that you feel like, ‘OK, great, I got a win under my belt.'”
When that debt is paid off, pay the next smallest debt and repeat.
“The snowball contrasts with another winter metaphor, the ‘debt avalanche method,'” Rossman said. “The avalanche involves sorting from highest interest rate to lowest. And the avalanche is going to save you more money mathematically because you’re paying down the highest interest rates first.”
By staying focused on the payoff goals and not adding new unnecessary debts, existing debts should slowly melt away.
“Sometimes you can switch back and forth or even do multiple things simultaneously,” said Rossman. “Regardless of the payoff method you choose, you do also likely have to make some lifestyle modifications just to make sure that you don’t go back there. There’s an industry saying that credit cards are like power tools. They could be really useful or dangerous.”