Debt Snowball Method: Before we get into the types and features, you should have a basic understanding of what is debt snowball method:
- A popular way to repay multiple debts under this type
- Keep your spirits high with motivation keeping up
- Efficiently designed for repayment
- Helps in maintaining momentum
How Does It Work?
Known as the Debt Serpent method (popularized by Dave Ramsey), you pay off your smallest debt and work up to larger debts. While some debt repayment plans center on paying off high-interest debts as quickly as possible, the snowball method focuses instead on creating short-term progress to maintain motivation. In this post, we will be discussing how the Debt Snowball Method works, the benefits of using it as a debt repayment strategy and more about walking through your own plan.
Debt Snowball Method Explained
The Debt Snowball: Pay the Smallest Balance First
As each debt is paid in full, the money allocated for that payment will then be rolled over to the new smallest debt which creates a snowball effect. Suitable mainly for those who require small wins to stay inspired while working towards debt-free living.
How the Debt Snowball Method Works
Highest Interest Rate Debt
Include credit cards, personal loans like payday and title loan advances. Say no to cash advance loans in whatever form these credits are paid by banks. The priority of the order should be at the balance outstanding and not on an interest rate.
Double Payment on Smallest
Double the amount of what you are paying until it is paid off.
Send More Money Yet Least Debt
Pay minimums on all of your debts but send as much extra money as you can to the smallest debt. If you choose to invest right now the savings may be extra added from non-essential items cut or a side hustle.
Dance In The Endzone After Paying Off the Smallest Debt
When you pay off that smallest debt, remind yourself of this small victory. Celebrating these milestones helps keep me motivated.
Snowball to Next Smallest Debt
Now you take the amount that was being paid on the first debt, plus pay off like 50 cents more than what would cover its interest from here out.
Maintain Until All Debts Are Eliminated
As individual debt is paid off, the “snowball” of money freed up to pay down your next piece of outstanding debt grows larger and faster.
Advantages of the Debt Snowball
1. Mental Wins and Where It All Comes From
This method gives you small wins, like when the tiniest debts get paid off. The psychological motivation and satisfaction that comes from accomplishing these “wins” keep individuals latched on to the idea of moving forward with their debt repayment journey. I think that this style works even better for those who need to see real progress in order to keep motivated.
2. Simplified Financial Focus
The Debt Snowball Method zeroes in on a single debt and offers an easy-to-follow path to smashing that one particular problem with all your might. This will ease the burden of making multiple payments, you can instead manage at one place and have a streamlined pathway to financial stability.
3. Increased Momentum
Paying off little debts frees up more coin to repay the next debt in line. This concurrently snowballs, further entrenching immediate repayment efforts and making it incrementally feasible to target larger debts as you go along.
4. Improved Financial Habits
We might argue that the debt snowball requires more discipline and planning in exchange for developing better financial habits over time. It promotes budgeting, spending less on luxuries, and saving more.
5. Reduces Financial Stress
When debts are stripped from the list, a feeling of relaxation that washes over you as your financial load lightens. It can also lower the amount of financial stress and future anxiety you have to deal with.
How to Get Started with the Debt Snowball
The Debt Snowball Method is a systematic approach to paying off debt and depends on careful thought, dedication, and resolve. A closer look at how to step by step:
Step 1 – Make a Complete Inventory of Everything You Owe
Write down all your debts — the name of the creditor, total balance, minimum monthly payment, and interest rate. Sort them from smallest balance to largest. Do not forget that it’s the amount of debt that matters, the interest rate is irrelevant.
Step 2: Create a Monthly Spending Plan
You want to create a monthly budget in which you pay all of your living expenses, while also setting extra money towards the smallest debt.
Point A — Look at where you can dial back Dining Out, Entertainment, and Non-essential Subscriptions. You might want to have those funds go towards paying off debt instead.
Step 3: Pay Minimum on All Debts
Just make sure that you continue to pay the minimums on all debts and keep your credit in good standing by meeting due dates. If you fail to make your monthly payments on time, it will cost more in late payment fees and damage your credit score.
Step 4: Pay the Rest of Your Cash to The Lowest Debt
With any extra available dollars you have in your budget (and every pay increase) put it toward the smallest debt. This could be any kind of money such as income from a part-time job, tax refund, or selling some things you have around the house.
Step 5: Adjust and Repeat
After the smallest debt has been paid, change your budget so that money no longer needed to cover that repayment can go towards paying off the next balance. Keep repaying your outstanding debts, and in doing so follow this pattern until all are gone.
Step 6: Celebrating Each Win
Celebrate every time you eliminate a debt! This goes from giving yourself a little indulgence to just acknowledging your success.
How to Stay Focused On the Debt Snowball
It is indeed simple to implement the Debt Snowball Method but following through can be another story. Some tips that could help us to remain focused Include —
1. Set Clear Financial Goals
Identify what you mean by being debt-free. Whether it’s buying a house, retiring comfortably, or simply getting out of the red: A roadmap can keep you moving in tough times.
2. Automate Payments
It can help you not miss any minimum payments by automating your payments and keep the debt snowball moving past just raw willpower.
3. Create an Emergency Fund
But before shelling money out for debt repayment, create a small emergency fund (no more than $1,000 or so). This will have the additional benefit of never needing to use your credit for an emergency and racking up more debt.
4. Avoid New Debt
When you are in the process of paying off your debt, simply stop taking new debts. That includes not overspending on credit cards, not taking out loans you don’t need, and staying away from high-interest payday lenders.
5. Track Your Progress
Spreadsheets, budgeting apps, or a visual debt tracker you can cross off as each debt gets paid down. This can be a strong motivation to keep going, and when you add efficiency here with it reduces the time so this part gets faster.
6. Stay Accountable
Inform a trusted friend, family member, or financial adviser of your goals. It is good to sometimes have someone hold us accountable through tough months.
Other Ideas for Debt Snowballing
Even though the Debt Snowball Method can work for millions it might not be one-size-fits-all. Here are a few alternatives:
1. Debt Avalanche Method
The Debt Avalanche Method targets the debt that has the highest interest rate, and so it will save you more money on interest in total than if you used The Snowball leveraging.
2. Debt Consolidation
This is as a result of debt consolidation, which simply involves merging multiple debts into one loan with lower interest rates. This can streamline payments and might even save you money in interest over the life of the loan.
3. Debt Management Plan
A debt management plan is an arrangement between a credit counseling agency and your creditors to lower interest rates, reduce fees, and set up more suitable payment plans.
Conclusion
The Debt Snowball Method is a powerful way to repay your debts in such a manner that it keeps you motivated and ensures success with every victory. That strength simply requires that you work your way up by diligently saving, helping to develop discipline in individuals while also giving them confidence. Now, although it might not always be the best route for saving on interest charges from a cost perspective, there is one very important added benefit to doing this: you are more likely to win financially which can give anyone additional motivation in sticking with their financial plan. With careful and committed implementation of the above, you can harness the power of the Debt Snowball Method to help yourself out of debt slavery into financial freedom.