snowball method
Money Management

Explaining Snowball Method, The Best Way to Pay Off Debt

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Dave Ramsey is a popular author and radio host in the United States. He’s problematic in many ways, but his advice on debt repayment method, dubbed the Debt Snowball Method is solid. It’s a loan repayment plan for people who owe money and overwhelmed by it.

What I’m going to try to do is to explain the Snowball Method in a way that is relatable to us Malaysians. So you can use it to pay off your debt, adviseice someone about it.

(Note: Find the original explanation on his website here, written for the U.S. audience.)

Meet Puteri*

*Fictional character; no real-life resemblance intended.

Puteri is a university graduate who works in KL. She owes money to a few financial institutions and her family.

 snowball method

From left to right, Puteri has:

  • Car loan – borrowed RM36k with 3% interest; balance RM20k
  • Credit card – borrowed RM1000 with 9% interest; balance RM1000
  • FAMA Bank (Bank of Father and Mother) – borrowed RM1500 with 0% interest, balance RM1500
  • PTPTN education loan – borrowed RM50k with 1% interest; balance RM40k
  • Personal loan – borrowed RM10,000 with 12% interest; balance RM8000

(interest rates taken from various comparison websites)

The logical approach when paying off debt is to prioritise repayment of the highest interest loan first before paying off next one. If that’s the case, Puteri’s order is:

  • Personal loan – 12% interest
  • Credit card – 9% interest
  • Car loan – 3% interest
  • PTPTN – 1% interest
  • FAMA Bank – 0% interest

It makes sense right? This way Puteri gets to pay the least amount of overall interest. So rational the solution.

Ok, here’s the thing. Math-wise it’s rational. Humans are not as rational, though. Dave Ramsey and a bunch of Harvard researchers say its better to prioritise debt in the order of their balances instead.

If you re-order Puteri’s loans by their balances, it’ll look like this:

  • Credit card – balance RM1000
  • FAMA Bank – balance RM1500
  • Personal loan – balance RM8000
  • Car loan – balance RM20k
  • PTPTN education loan – balance RM40k

Why should Puteri pay off credit card balance first if personal loan have a higher interest rate? Because ticking off debt one by one gives you more motivation along the way. Say Puteri paid off her lowest amount of debt, credit card. Now it’ll look like this:

  • Credit card – balance RM1000 (Paid off in full!)
  • FAMA Bank (minimum payment to indicate goodwill)
  • Personal loan – balance RM8000 (minimum payment to avoid further interest)
  • Car loan – balance RM20k (minimum payment to avoid further interest)
  • PTPTN education loan – balance RM40k (minimum payment to avoid further interest)

Idk about you but even crossing out one loan in this hypothetical example gave me a lot of satisfaction.

Then Puteri can do the same thing for the rest:

  • FAMA Bank – balance RM1500 (put in extra money to pay this off in the quickest timeframe)
  • Personal loan – balance RM8000 (minimum payment to avoid further interest)
  • Car loan – balance RM20k (minimum payment to avoid further interest)
  • PTPTN education loan – balance RM40k (minimum payment to avoid further interest)

And so on and so forth. Whichever debt has the lowest balance, pay off that one first.

General tips and tricks in paying off debt

Personally, I’m the type of person who is uncomfortable with borrowing money, I don’t like to be in debt. I aim to not owe anyone anything. If I can repay all my debt in 10 years instead of 25, why not? Peace of mind.

If our thinking is aligned, and you do have debt to pay off, here are more tips and tricks:

  • Always find out if there are opportunities to reduce your loan balance. For example, PTPTN offers 15% discount on one-shot repayment. There might be a balance transfer plan that gives better rates. Then re-order according to the new balance.
  • Check if there are penalties to paying off loans early. Sometimes they have penalties, those sneaky bastards. If they do, add it to the balance and re-order again.
  • Don’t get another (bad) loan. Avoid racking up more debt, especially credit card and personal loan debt.
  • Try to not skip minimum payments. Unless you’re really short in cash and can’t trim your budget any further. If you have to miss, try giving each institution a call to see if you can renegotiate terms, like asking smaller payments or asking for an extension. It’s worth a shot. If not, ask FAMA Bank. If not, it’s ok, it’s not the end of the world. Ask AKPK and see if they can intervene and help in any way.
  • Find ways to increase income and reduce expenses. Chuck all your extra money to repayments so you’ll get out of debt faster.
  • If the interest rate is really small (0-1%), it’s OK to split your money and use a part of it to start investing. Check out how to start investing even with RM1000.
  • Never take advantage of FAMA Bank. Pay back your parents. Don’t rob from their retirement funds.

There may be more tips, I’ll add more as I have them. If you have additional tips, do share in the comments and I’ll add them in (crediting yourself).

Related: My Debt Management: All The Good Debt & Bad Debt I’ve Taken So Far

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  1. i use the snowball method for my credit card debt and a huge relief when i managed to pay off the full settlement.Now focusing on restructuring my PTPTN debt and applying the same method.

    1. Congratulations on paying off debt! Idk why but I’m always happy when I hear this, good job anep 😀

  2. i have personal loan, car loan and ptptn. Should i settle personal loan first?

    personal loan – 34k (900/monthly) – 5 years
    car loan – 52k (620/monthly) – 9 years
    ptptn – 15k (120/monthly) – idk lol

    1. Hey Awesome Guy,

      I’d suggest personal loan (likely the highest interest rate), then car loan, all while making regular PTPTN repayments

  3. I still prefer to pay off my loan with the highest interest rate since I know the lowest debt with the lowest interest would be paying it off easily. it’s depending on the mindset of that person and how they managing their risk management.

    That’s just my opinion 🙂

  4. Hi! While reading through and learning about snowball method, I was wondering while we try to settle one debt at a time does that mean we are going to hold on the monthly payment for the other debts? For example if I am focusing on paying my credit card debt, but how about my paying my monthly education loan?

    1. Hey Anis,

      If you can and if there’s no penalty, yeah. Concentrate effort one by one. If there is penalty, then avoid not paying the rest. Pay at least the minimum you need to avoid penalty – no point to incur more debt!

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