Debt Snowball Method
The Debt Snowball Method is a debt reduction strategy where debts are paid off in order from smallest balance to largest, regardless of interest rate, providing psychological wins that build momentum.
Exam Tip
Snowball = smallest BALANCE first (ignore rates). Quick wins build momentum. Pays MORE interest than avalanche. Best for clients who need motivation.
What is the Debt Snowball?
Popularized by Dave Ramsey, prioritizes behavioral finance over pure mathematics.
How It Works
- List debts from smallest to largest BALANCE (ignore rates)
- Make minimum payments on all except smallest
- Throw extra money at smallest debt
- When paid off, roll payment to next smallest
- Repeat until debt-free
Example Order
| Debt | Balance | Rate |
|---|---|---|
| Medical | $500 | 0% |
| Credit Card | $2,500 | 22% |
| Car | $8,000 | 6% |
| Student Loan | $15,000 | 5% |
Pros/Cons
- Pro: Quick wins build motivation
- Con: May pay more interest than avalanche
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Related Terms
Debt Avalanche Method
The Debt Avalanche Method is a debt reduction strategy where debts are paid off in order from highest interest rate to lowest, minimizing total interest paid and providing the mathematically optimal path to debt freedom.
Emergency Fund
An Emergency Fund is a readily accessible savings reserve equal to 3-6 months of essential living expenses, designed to cover unexpected costs or income loss without requiring debt or liquidating investments.