While most people spend time on TikTok watching viral dance routines and challenges, some financial-minded scrollers are curating FYPs that help them become better money managers.
Financial TikTok — or FinTok, to those in the know — is the side of the social media platform where browsers can find money-saving tips. The latest trend to go viral on FinTok is the snowball debt method.
With more than 25.7M views and counting, the snowball method is growing traction online, but it’s not the first time this debt-reduction strategy has made headlines.
For years, financial author Dave Ramsey has been the snowball method’s biggest proponent, citing it as the best way to keep motivated when tackling debt.
What is the Debt Snowball Method?
The debt snowball method prioritizes paying off the account with the smallest outstanding balance before moving on to the next account.
It earns its name as a snowball because it harnesses the momentum of little payments to grow until you can wipe out big debt. Like a snowball that grows bulkier as it rolls downhill, your debt payments increase as you move through your loans.
How do you make a snowball?
First, you must list all your outstanding unsecured debt that doesn’t include a mortgage. Make sure you list all your remaining debt, regardless of how old or new it is, even if you apply online today for an installment loan.
Once you have this list, order them by outstanding balance from smallest to largest.
You’ll want to make sure you can cover the minimum monthly payment for every account on your list. However, any extra cash you have for debt will go towards the account with the lowest balance.
Once you pay off this account, you can roll in what you put towards it (i.e., the extra cash and its monthly minimum) into the second smallest account.
Is the Snowball Method an Effective Way to Pay Off Loans?
According to snowball rules, you’ll focus on the size of debt rather than the interest rate. This means you may accrue more interest by following this guide than if you were to knock out high-interest debt first.
That said, research shows the snowball method is a more effective way to pay off debt, even if you wind up paying more interest.
A 2012 study by Northwestern’s Kellogg School of Management found that people who follow the snowball technique are more likely to eliminate their debt than those who target high-interest balances first.
Four years later, in 2016, the Harvard Business Review published a similar study that shows paying off the debt with the smallest balance has a powerful effect on your morale.
Since you may pay off a small balance faster than other larger, high-interest accounts, you feel accomplished. This can motivate you to keep paying down other accounts more than saving money in interest.
In the words of Dave Ramsey, the snowball method celebrates the small wins, and these victories can help you stick with your plan to eliminate your credit card and short-term personal loan debt.
You can’t trust everything you see on FinTok. In fact, there’s a lot of bad advice to avoid! However, when it comes to the snowball method, it’s a debt-reduction strategy backed by science.