Guest article from daviddenniston.com
What is the debt snowball?
How does it work?
How can it help you become debt free?
If you are struggling with paying off your debt, remember it’s not about what you make, it’s what you keep. This is a wonderful method to wipe out your debts bit-by-bit.
The basic idea is this: you’re at the top of a huge debt mountain. It seems colossal! There’s no way you’re going to be able to take this all out. Now, you wonder how the heck you’re ever going to get down from the mountain.
Start out with a handful of debt, crunch it up into one delightfully cold snowball—something you can easily mold with your hands.
Push that snowball down the mountain.
Slowly but surely, the snowball becomes bigger and bigger. It collects more and more snow, rolls faster and faster.
The snowball has become a snow boulder.
It keeps tumbling faster and faster, gaining more and more momentum until it’s an avalanche!
This my friends is the basic idea—start small and work your way slowly until you’ve wiped out your debt.
Let me put this into a case study to help you better understand…
Debt Snowball Case Study
| Name of Lender | Type of Debt | Interest Rate | Balance | Monthly Payment |
| Wells Fargo | Mortgage | 4% | $400,000 | $2,500 |
| Honda | Car | 0% | $15,000 | $600 |
| US Bank | Credit Card | 0% (goes up in a year) | $10,000 | $100 |
| Barclays | Credit Card | 20% | $5,000 | $200 |
| Wells Fargo | Personal Loan | 10% | $10,000 | $300 |
| Sallie Mae | Student Loan | 5% | $80,000 | $600 |
So, remember that the idea of the debt snowball is to focus on something small. In terms of debt, it could be the smallest loan balance or it could be the smallest monthly payment.
The smallest monthly payment is the US Bank Credit Card, whereas the smallest balance is the Barclays Credit Card, which also happens to be the highest interest rate.
In this scenario, I would suggest focusing on the smallest balance loan. It’s relatively small and easy to wipe out and you’ll save yourself a ton of interest right out the gate!
So when this person gets their next tax return or they get some extra savings or a bonus at work or if they could force themselves to save some more —- they should put ALL of that extra money toward ONLY that Barclays $5,000 credit card.
Once that’s wiped out, the $200/mo they have been putting toward the credit car shouldn’t be added to their living expenses or even put in a 401k or investment account.
Instead, let that snowball GROW into a snow boulder. Put that extra $200/mo toward the next LOWEST balance, highest interest rate debt.
Depending on when they do it— it could be the US Bank credit card if the interest rate got cranked up on them or they moved it to another 0% interest rate care. Ideally, if the interest rate stayed the same— put that extra $200/mo towards the Wells Fargo personal loan.
Here’s what the scenario could look like now— let’s say one year later.
| Name of Lender | Type of Debt | Interest Rate | Balance | Monthly Payment |
| Wells Fargo | Mortgage | 4% | $390,000 | $2,500 |
| Honda | Car | 0% | $10,000 | $600 |
| US Bank | Credit Card | 0% (goes up in a year) | $9,000 | $100 |
| Barclays | Credit Card | 20% | $0- PAID OFF | n/a |
| Wells Fargo | Personal Loan | 10% | $8,500 | $300/mo minimum, NOW do $500/mo to pre-pay it |
| Sallie Mae | Student Loan | 5% | $77,000 | $600 |
Let’s say yet another year passes by and the Wells Fargo personal loan has been paid off….
Congrats!!! Now 2 debts have been FULLY paid.
Use the $300/mo from the Wells Fargo and the $200/mo from the Barclays card to pay off the next smallest balance loan.
Clearly that’s now the Honda car loan since that balance is coming down a lot quicker than the US Bank credit card. Both are a 0% interest rate, so it’s a pretty easy decision.
| Name of Lender | Type of Debt | Interest Rate | Balance | Monthly Payment |
| Wells Fargo | Mortgage | 4% | $380,000 | $2,500 |
| Honda | Car | 0% | $4,000 | $600/mo minimum, NOW do $1,100/mo to pre-pay it |
| US Bank | Credit Card | 0% (goes up in a year) | $8,000 | $100 |
| Barclays | Credit Card | n/a | $0- PAID OFF | n/a |
| Wells Fargo | Personal Loan | n/a | $0- PAID OFF | n/a |
| Sallie Mae | Student Loan | 5% | $74,000 | $600 |
With a balance of only $4,000, the Honda will take less than 4 months to pay off! Fast forward 4 months later and do it all over again, add that $1,100 to the next loan…
| Name of Lender | Type of Debt | Interest Rate | Balance | Monthly Payment |
| Wells Fargo | Mortgage | 4% | $379,000 | $2,500 |
| Honda | Car | 0% | $0- PAID OFF | n/a |
| US Bank | Credit Card | 0% (goes up in a year) | $7,600 | $100/mo minimum, NOW do $1,200/mo to pre-pay it |
| Barclays | Credit Card | n/a | $0- PAID OFF | n/a |
| Wells Fargo | Personal Loan | n/a | $0- PAID OFF | n/a |
| Sallie Mae | Student Loan | 5% | $73,000 | $600 |
Fast forward another 6 months and that US Bank Credit Card is paid off and we add $1,200/mo extra to the next loan— the student loan! At this point, you may want to consider investing instead of paying off your debt (I know, that’s crazy, but hear my reasons here.)
| Name of Lender | Type of Debt | Interest Rate | Balance | Monthly Payment |
| Wells Fargo | Mortgage | 4% | $379,000 | $2,500 |
| Honda | Car | 0% | $0- PAID OFF | n/a |
| US Bank | Credit Card | 0% (goes up in a year) | $0- PAID OFF | n/a |
| Barclays | Credit Card | n/a | $0- PAID OFF | n/a |
| Wells Fargo | Personal Loan | n/a | $0- PAID OFF | n/a |
| Sallie Mae | Student Loan | 5% | $73,000 | $600/mo min, NOW do $1,800/mo to pre-pay it |
More than likely within 3 years the student loan is now gone and all that’s left is your mortgage, and you have $1,800/mo MORE cash flow every single month from wiping those payments.
Now you have options— you could save more, pay down your mortgage quicker, or maybe relax and enjoy life some more.
Or do all of those!!!
You have climbed up the mountain and made your way down it and erased your debt—- congrats!!!
Enjoy the hot chocolate and lean back and put your feet up. Most of all, make a promise to never climb that mountain again!
Do you have questions about how you can create your own debt snowball to overcome that debt mountain?
About the Author
Dave Denniston, Chartered Financial Analyst (CFA), is an author and authority for physicians providing a voice and an advocate for all of the financial issues that doctors deal with. He also has 1 wife, 2 kids, and a bunny named Black Snow (which is a lot better of a name than Yellow Snow).
If you’ve enjoyed this guest post, you can learn more about his adventures in illiquid investments & much more nonsense by finding his latest blog post and videos by clicking here.
Advisory services through Capital Advisory Group Advisory Services LLC and securities through United Planners Financial Services of America, a Limited Partnership. Member FINRA and SIPC. The Capital Advisory Group Advisory Services, LLC (CAG) and United Planners Financial Services are not affiliated.
The views expressed are those of the presenter and may not reflect the views of United Planners Financial Services. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation. Neither United Planners nor its financial professionals render legal or tax advice. Please consult with your accountant or tax advisor for specific guidance.