How to Create a Debt Elimination Snowball

I’m sure you’ve heard about debt elimination snowballs by now, but may not quite understand how to go about setting one up. If you have any debt at all, this is by far the best method to getting it knocked out as quickly as possible.

There are several approaches to setting up a debt elimination snowball, but the two most common are arranging the payoff order either by interest rate or by balance.

The Interest Rate Snowball

This approach arranges the debts by interest rate – highest to lowest and debts are paid off in that order. You’ll pay less interest overall using this arrangement. For example:

As you can see, the total of minimum payments each month is $650. You’ll need to come up with a doable amount over that to get the snowball rolling….say an additional $250 a month to start.

That $250 will be added to the minimum payment of Dell Computers for a total of $400 ($150 + $250). You’ll pay $400 a month to Dell until the debt is paid off, and then move that $400 to the next debt and so on. Can you see the snowball effect? Those debts will be squashed in no time!

Using the scenario above, the $14,300 would be paid off in 2.8 years. Paying only the minimum would take an additional year with more interest paid. The more you can add to the initial debt elimination snowball amount, the faster everything gets paid off and the less interest paid to your creditors.

The Balance Snowball

For this approach, debts are arranged by balance – lowest to highest and debts paid off in that order. You will pay a little more interest (about $40 more in this scenario), but everything is paid off in about the same amount of time.

Now, here’s the question…why would anyone choose the balance method if more interest is being paid? Because lower balances will get paid off faster and psychologically this is VERY powerful. It will give you the incentive to stick with the plan and see it through.

Realistically, people in deep financial trouble will have a much bigger debt load than listed here for illustration purposes and seeing those balances crushed by a snowball is thrilling indeed! The balance layout is recommended by Dave Ramsey’s Total Money Makeover because it has proven to be more effective in the long run.

Here is a link to a free (and so far, the best) online Debt Elimination Snowball spreadsheet.