The Debt Snowball Method
If you’ve ever made a snowman, you know that the fastest way to build one is to pack some snow into a tight ball and start rolling it around your yard. Your snowball quickly turns into a snow boulder.
How It Works
Basically, it’s a debt-reducing plan where you pay off debt in order of the smallest amount to the largest. When the smallest debt is paid off, the minimum amount that was being paid on that debt is rolled into the next-smallest debt .
To begin, make a list of your debts from smallest to largest amount irrespective of the interest rate.
Next, make the minimum payments on all your debts except the smallest. Then pay as much as possible on your smallest debt. Repeat the process until each debt is paid in full.
When you stick to this plan without stressing about interest rates, your excitement will motivate you to keep working all the way to that debt-free goal.
Why Does It Work?
It’s all about changing your debt- paying routine. Success is 80% motivation and 20% knowledge. The real first step then, is to change your debt-paying habits.
Let’s say you start paying the largest debt first. It won’t go away for a while. You’ll see the balance going down but pretty soon you’ll lose momentum and stop paying extra. The reason is that it’s taking forever to envision success and all your smaller debts are still there.
But when you discard the smallest debt first, you see quick success! The second debt will be next and so on. Now you’re paying more dollars a month toward your debt instead of small minimum payments. When you see this snowball effect working, you’re more likely motivated to stick to it.
Let’s Look at an Example:
Above is an example of the way most debt repayments are allocated.
Above is the recommended debt repayment per the Debt Snowball Method outlined below.
Reduce Credit Card payment to a minimum, freeing up $25.
Add extra $25 to the current $50 payment for Dental Bill ($75) (6 mos.)
Dental bill is eliminated, then its $75 payment is added to Credit Card’s minimum $50 payment. ($125) (9 mos.)
Credit Card balance is eliminated; $125 payment is added to Auto Loan payment. ($375) (7 mos.)
Auto Loan balance is eliminated, the $375 payment is added to the Student Loan payment.($775) (15 mos.)
By the time you reach that student loan (your biggest debt), you can put $775 a month toward it. That means you’ll be sending Sallie Mae your final payment in about 15 months.
With all your hard work and sacrifice, throwing extra money into the snowball and staying focused on the goal, you’ll have paid off $16,274 in about 37 months using the debt snowball method. (vs. 65 mos.)
Just like the snowball gaining speed on its way down the hill, you can power through paying off debt. Watch your momentum—and success—grow as you go, one debt at a time.