What does 'debt snowball' refer to in personal finance?

The concept of 'debt snowball' in personal finance specifically refers to the strategy of focusing on paying off the smallest debts first in order to gain momentum and motivation. This approach is based on the psychological principle that achieving small wins can encourage individuals to stay committed to their debt repayment journey. By eliminating smaller debts, a person can experience a sense of accomplishment which can provide the motivation needed to tackle larger debts over time.

This method is favored by many personal finance experts, including Dave Ramsey, because it tends to help borrowers build confidence and maintain discipline in managing their finances. The successes from paying off smaller debts can create positive reinforcement, enabling individuals to sustain their debt repayment plans even when faced with larger, potentially more daunting responsibilities.