The debt snowball is a frequently-recommended method for successfully paying off debts in a relatively short period of time. It is related to the concept of compound interest, and it works by starting with small payments and building upon small, early successes to create larger, quicker successes later. But if you don’t pay off your debts, they can quickly snowball and bury you just as easily — the snowball effect works both ways. Successes tend to build upon and magnify each other, and failures do the same. And this effect isn’t limited to wealth — there are examples of it in health and relationships as well.
Let’s examine the snowball effect first in the context of money. Let’s say you have several outstanding debts (loans, credit cards, etc.) and you pay the minimum on each every month. At this rate, you will be in debt for roughly the rest of your life. To get out of debt, you can use a debt snowball: figure out how much more you can spare, and pay it all into one debt — typically either the one with the highest interest rate or the one with the lowest balance (there are good reasons for both; which one is best depends on your personality). When that one is paid off, take all the money you were paying into it every month and add it to what you’re already paying on the second one. You’ll be paying it off at a faster rate than you did the first one. When that’s done, roll the whole payment that used to go into the first and second debts into the third one. That will go even faster, and you’re well on the way to being debt-free. It can take a while, but if you don’t rack up more debts along the way, it will go faster and faster the longer you do it. It builds momentum.
Saving money works the same way. Compound interest builds savings in a manner similar to the debt snowball. The more money you have, the more you make, so there’s more there next time, so you make even more, and so on.
Of course, if you have debts and you don’t pay them down, the snowball effect will work against you — every month your debt will grow more than the previous month as interest and penalties accumulate and become the basis for the following month’s interest and penalties. The balance owed gets bigger and bigger faster and faster until you can’t possibly keep up with it! It’s important to keep the snowball effect working for you and not against you. Compound interest is a powerful double-edged sword.
The snowball effect isn’t limited to personal finance, though. It can also appear in other areas of your life. For instance, depression is a negative snowball effect that affects your mood. It’s a vicious circle. Depression can deter you from fixing your problems, allowing them to get worse, which can be even more depressing. This was my situation five years ago — I was suffering from Major Depressive Disorder and $14,000 in debt besides. And the way I recovered from depression was very similar to the way I paid off my debts, though I had to take out a “loan” to recover from the depression, in the form of psychiatric treatment. Medication gave me the traction I needed to start making small positive changes in my life, those positive changes helped me feel better enough to make slightly more significant positive changes, and so on, until I no longer needed the medication and no longer felt depressed. The snowball effect in action.
I’m experiencing a negative snowball effect right now in my physical health, and working on finding the willpower to reverse it. An unhealthy diet and not enough exercise contributed to my being overweight, which makes it harder to exercise, which exerts pressure toward getting fatter and more unhealthy. One of my major focuses in the next month or two will be discovering ways to turn my health snowball around and make it work for me instead of against me. All I need to do is identify and implement the health equivalents of the things I did to improve my finances and mental health.
Snowballs can be used in relationships too, building your confidence on social settings and trust and intimacy with the people in your life by starting out with small steps and building on them. The more I learn about how to improve various areas of my life, the more I’m struck by the parallels between them. It seems like the same ideas come up in exercise as in dating as in personal finance as in mental health as in entrepreneurship as in healthy eating as in everything! It almost seems like it should be possible to create a generic template for “how to improve your X” which applies for nearly all values of X. One element of that template would be the snowball effect.
What other ideas do you have for applying the snowball effect?