The Debt Snowball: The power of compounding payments

Surely you've heard of the debt snowball but what does it really mean? Can it really help you get out of debt faster?

What is the Debt Snowball?

The debt snowball is an effective method of paying off debt quickly. The method has been popularized by finance experts like Dave Ramsey in books like the Total Money Makeover.

The term "snowball" refers to the roll down effect of the compounding payments. Rolling down the payment builds momentum not unlike a snowball rolling down a hill.

Through the power of compounding payments and by targeting one debt at a time the snowball method reduces the amount of interest paid over the life of your debt. Snowballing is a fast and efficient way to rid yourself of debt. It has helped alot of people achieve their goal of becoming debt free - including yours truly!

Want to see how fast you can pay off your debt using snowball method? Check out this really cool snowball calculator!

The Debt Snowball In Action!

Settling the order debate: Smallest vs Highest Interest

Finance experts are in agreement, the debt snowball works! However,there is some debate about the order in which debts should be paid. Some financial experts like Dave Ramsey say it's better to pay the smallest balance debts first. Others will tell you it's better to pay the highest interest debts first. Both have merit but it really just boils down to personal preference.

• Pay the smallest balance debts first if you need the satisfaction of knocking off debts quickly

• Pay the highest interest debts first if you want to pay less interest over the life of the debt

As you can see in the table above it will take you 18 months to pay off these debts if you snowball correctly. During that time, you'll pay $1,473.00 in interest. If you paid the same amount per month but paid your smallest balance debts first, it would cost you an additional $395.00 in interest.

Bottom line: It makes more sense to pay your highest interest debts first!

How to Get your Debt Snowball Rolling

1 List all your debts - List your debts in order, highest interest debts first (or smallest first if you prefer). Be sure not to leave out any of your debts. The debt at the top of your list is your "target debt".

2 Figure out how much you can pay - If you've already done your budget you will already know how much money you can put towards paying down your debt. A good rule of thumb is to commit between 10-15% of your net monthly income to debt reduction.

3 Pay it down (make your snowball) - With the money you have allocated to pay down debt pay just the minimum on all the other debts in your list. Whatever's leftover is your "snowball" and that goes onto the target debt.

4 Roll it down (roll your snowball down the hill) - Continue snowballing your target debt until it's paid off. Then roll down to the next debt which now becomes the target debt.

5 Keep it rolling (your snowball grows into a boulder) - As your snowball builds momentum your debts get paid off faster - but don't stop there. Help your snowball go even faster down the hill - use any extra money you get like bonuses, tax returns and so on to speed up the process even more.

Congratulations! You're well on your way to becoming debt free.

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