Debt Snowball

The Debt Snowball is a popular and psychologically powerful strategy for paying off debt. Imagine a small snowball at the top of a hill. As it rolls, it picks up more snow, growing bigger and faster. This method applies the same principle to your finances. You start by listing all your debts, not by their interest rate, but by their outstanding balance, from the smallest to the largest. You make the minimum required payments on all your debts, but you channel every extra bit of money you can find toward obliterating the smallest debt first. Once that smallest debt is paid off, you take the entire amount you were paying on it (the minimum payment plus all your extra payments) and “roll” it over to attack the next-smallest debt. This creates a growing “snowball” of payment that accelerates as you knock out each successive debt, building momentum and motivation along the way.

The magic of the Debt Snowball lies in its simplicity and the quick wins it delivers. It’s less about complex math and more about building positive momentum.

First, lay it all out. List every single non-mortgage debt you have. Don't worry about interest rates for now. Just order them from the smallest balance to the largest.

• Example List:
• Store Credit Card: €500
• Medical Bill: €1,200
• Car Loan: €7,000

You must stay current on all your accounts. Continue to make the minimum required payment on every single debt on your list. Missing payments will incur fees and damage your credit score, working against your goal.

This is where the focus comes in. Find as much extra money as you can in your budget—by cutting expenses, picking up extra work, or selling things—and throw it all at the smallest debt.

• Example Attack:
• Store Card Minimum: €25
• Medical Bill Minimum: €50
• Car Loan Minimum: €200
• Extra cash found in budget: €125

You would pay the minimums on the medical bill (€50) and car loan (€200). Then, you would combine the store card's minimum with your extra cash and send a total payment of €150 (€25 + €125) to the store card.

Once the smallest debt is gone (Hooray!), you don't go on a spending spree. You take the full payment amount you were sending to that debt (€150 in our example) and add it to the minimum payment of the next-smallest debt.

• Example Rollover:
• Your new payment for the medical bill becomes €200 (its €50 minimum + the €150 snowball).
• You continue paying the €200 minimum on the car loan.

Once the medical bill is paid off, your snowball grows again. You'd roll the €200 over to the car loan, attacking it with a massive €400 payment (€200 minimum + €200 snowball) each month until you are completely debt-free.

While mathematicians might scoff, behavioral economists love the Debt Snowball. Why? Because personal finance is more about behavior than it is about math. The method is designed to create a series of quick, motivating victories. Paying off that first, small debt feels fantastic. It provides a tangible accomplishment and proves that you can make progress. This emotional boost provides the fuel to stick with the plan long enough to tackle the larger, more intimidating debts. It gamifies debt repayment, turning a stressful chore into a rewarding challenge where you level up with each “boss” (debt) you defeat.

The primary alternative to the Debt Snowball is the debt avalanche. It’s important to understand the difference.

The Debt Avalanche method prioritizes debts by the highest interest rate, not the lowest balance. From a purely mathematical standpoint, this is the superior strategy. By tackling the highest-interest debt first, you will pay less total interest over the life of your loans, saving you money. If you are a disciplined, numbers-driven person who doesn't need psychological boosts to stay on track, the Avalanche is your most efficient path.

The problem with the Avalanche is that your highest-interest debt might also be your largest. It could take months or even years to pay it off, leading to burnout and a feeling of making no progress. Studies have shown that people are more likely to stick with and complete a debt-repayment plan using the Snowball method because the frequent positive reinforcement keeps them engaged. The best plan is the one you actually finish.

For a value investor, building wealth starts with a solid foundation, and that foundation is a strong personal balance sheet. High-interest consumer debt is like trying to build a skyscraper on quicksand—it's destined to fail. Getting out of debt is the first and most important investment you can make. Think of it this way: paying off a credit card with an 18% APR is mathematically equivalent to earning a guaranteed, tax-free, risk-free 18% return on your money. Not even legends like Warren Buffett can consistently generate those kinds of returns. It's the best deal in town. By eliminating debt with the Snowball method, you are not just cleaning up your finances; you are systematically increasing your cash flow. That liberated cash flow is the ammunition you will use to acquire undervalued assets and build real, long-term wealth. Before you can be a successful investor, you must first become the CEO of your own finances, and the Debt Snowball is one of the most effective tools for staging a successful corporate turnaround.