Repaying debt: Why the snowball method works

Remember Sisyphus from the Greek myth? He was doomed to spend eternity rolling an immense boulder up a steep hill, only to watch it fall back down again.

Climbing out of debt can feel a lot like that. In the beginning, the task seems overwhelming. We might toil for a while, but when our efforts don’t produce tangible results right away, we often get discouraged and quit. Many people end up slipping right back into their old spending habits.

But what if we’re simply going about it the wrong way? Research suggests that choosing the right debt repayment strategy can measurably increase your chances of success—and the best method might not be the one you think.

Financial experts usually recommend tackling the debt with the highest interest rate first and working your way down the list. Known as the avalanche method, this approach saves you the most money on interest—but it often means chipping away at your biggest debt with no end in sight. No wonder so many of us give up!

That’s why many advisers now advocate for the snowball method. Instead of focusing on the debt with the highest interest rate, you pay down the one with the lowest balance first. While you’ll end up paying more interest in the long run, you get the benefit of paying off individual debts more quickly.

Benefits of the snowball effect

Studies have found that folks who use the snowball approach are more likely to pay off their entire debt load than those who use other methods. Why?

One reason is that you’re putting all of your extra resources toward paying off one debt at a time—not splitting your money between multiple debts. Studies have shown that people who use a concentrated repayment strategy work harder and pay off their debts 15 percent faster.

But which debt should you concentrate on first? On paper, at least, the avalanche method appears to be the most practical. For example, let’s say you’ve got an extra $50 a month to pay down three credit cards on which you owe:

• $5,000 at 18.9 percent interest
• $3,000 at 15.9 percent
• $2,000 at 11.9 percent

If you prioritize the card with the lowest balance, you can pay it all off in just over five years and save nearly $2,600 in interest. Not bad. But focusing on the highest interest rates first would eliminate your debt three months sooner and save you an extra $541 in interest.

Of course, that’s assuming you’re able to stick with it. In reality, people who try the avalanche method often give up because they don’t feel like they’re making any progress.

The advantage of the snowball method is that you’ll pay off your first debt more quickly—and that small victory can give you the motivation you need to keep going. Researchers have demonstrated that our motivation to achieve a goal increases as we get closer to it. Even the illusion of progress can inspire us to work harder.

“Getting out of debt isn’t about math—it’s about changing behavior,” says financial guru Dave Ramsey. “When you pay off your smaller, nagging debts, you see the benefits instantly. Those quick wins motivate you to continue the behavior. Your wins keep adding up until you reach your goal of becoming debt-free.”

The snowball method works because it uses our behavioral tendencies to propel us forward. One study even concluded that it’s the strategy most people naturally turn to when tackling their debts. Ultimately, however, the best debt repayment strategy depends on your personality.

“If you need short-term victories to inspire you, you’re a snowball candidate,” says NerdWallet. “If you tend to be analytical and patient, the debt avalanche will let you repay debts in the shortest time and with the least interest—but with fewer rewards up front.”

How to use the snowball method

Ready to try the snowball method? Here’s how it works:

STEP 1: List your debts according to balance, from smallest to largest. If two debts have a similar balance, put the one with the higher interest rate first.

STEP 2: Budget enough money to make the minimum payment on each, then figure out how much extra you can put toward your debt repayment plan.

STEP 3: Pay the minimum payment plus the extra amount on your smallest balance until it’s paid off.

STEP 4: Each time a debt is paid in full, add up everything you were paying on it and apply it to the next balance on your list. This includes:

• All minimum payments from the debts you’ve already paid off
• The extra amount you budgeted for
• The minimum payment of the debt you’re focusing on

STEP 5: Rinse and repeat until you’re debt-free.

If you’re tired of rolling the same heavy boulder up that steep hill, the snowball method could be your ticket to financial freedom. Try it and see!