The Debt Snowball Method
For most people, the idea of getting out of debt can seem almost impossible. It can seem unreachable because it can take many years to achieve, even when following the strictest of debt elimination plans. However, paying off debts and credit cards can lead to a better debt-to-income ratio. This is a big factor when a credit score is calculated and creating extra disposable income can lead to more debt repayment in the future. One popular method used to repay debt that many follow is called the Debt Snowball Method.
The main reason that the snowball payment method works well for people in debt is because it is a debt reduction plan that is designed in a way to create noticeable results early on. It’s for the “instant gratification” type of individual. This, in turn, keeps people motivated to continue to pay off their debts.
The Basics of the Snowball Method –
People who take on the debt snowball method first start out by listing all of their debts. The list will start with their smallest debt and work towards their biggest debt at the bottom. There is no regard to interest rates on each debt in this method. Using this technique, the debtor will pay the minimum payments each month on every debt except the one with the smallest balance. They will use all available extra funds to pay towards this debt each month until it is paid off.
To pay off these debts faster, many people will cut back on unnecessary expenses or find second jobs to be able to pay additional money towards their debts. When the balance of the smallest debt reaches zero, all of the additional money (as well as the original minimum payment paid on the paid off debt) will go towards the next smallest debt. This process is repeated again until the second debt gets paid off, and so on and so forth.
How the Snowball Payment Method Works –
Creating a good budget is an important part of making the snowball method work. Having a budget lets people know where their money goes each month and how much of that money is available to go towards paying down their debts. To pay off the debts quicker, a person may look to cut expenses out of their budgets that they don’t need and use that money towards paying down their debts faster. For some, this could mean cutting out restaurant expenses or entertainment expenses until the debts are repaid.
Start by Making a Debt List –
To begin your snowball, start by listing all your credit card debts in order from smallest to largest. Remember, you want to attack the smallest debt first so you see results faster. Next, total up the minimum payments you are making on all of your cards to see how much you are paying each month. Continue paying the minimum on all of your cards except the card with the lowest balance. If possible, try to add money to that monthly payment. Paying more than the minimum will help you pay off the balance faster. For instance, if your smallest debt is $100 with a minimum $10 monthly payment, by increasing your monthly payments to $20, you will pay off the balance in about six months versus 10 months.
The Snowball Effect Begins –
Once you have eliminated the balance on your lowest card, the debt repayment snowball effect begins. Apply the $20 you were paying on your lowest card to the next lowest balance in line. If you were paying $30 a month, you will now be paying $50. Once that balance is eventually paid, apply that $50 you were paying per month to your next lowest balance and so on.
Remember, once you have paid off a credit card, you are going to simply add that monthly payment to the next card in line. So, if at the beginning of this process you were paying a total of $300 per month on all of your cards, you will continue to pay $300 total, even after you begin wiping your cards free of balances. As you continue to apply more money to the next card in line, you will see the snowball really pick up speed. As your snowball gains momentum, so will your motivation to maintain a steady path to eliminating your debt.
Advantages of this Debt Repayment Method –
While there are advantages to paying off debt no matter how it’s done, there are some great benefits to using the snowball method to repay debt that is perfect for certain individuals. The main advantage that people get from this particular method is the psychological boost they receive.
Many people need to actually “see” debts disappearing quickly to keep motivated, even if it is a small debt. This method also helps those in debt learn how to manage their money better by focusing energy towards one debt at a time instead of worrying about all of them each month. This can help ease the stress of having debt and can help keep people more motivated in the long run.
If you owe money on multiple credit cards, you may be wondering where to focus your efforts and which card to pay off first. Some financial experts believe, when attempting to manage your debt, you should aim to eliminate the card with the highest interest rate first. While this method is very effective, if the card with the highest rate also has the highest balance, it may take over a year or two to make a dent in the balance, leaving you feeling like you’re spinning your wheels and getting nowhere.
Instead, try focusing your efforts on eliminating the smallest balance first and gradually moving on to your higher balances. Using this method, you will see results quickly and a “light at the end of the tunnel” much faster. Dave Ramsey is a big advocate for this method and he talks about it frequently.
Who Benefits from the Debt Snowball Method –
This method is particularly good for consumers that have numerous credit cards with outstanding balances. If some of your credit card accounts have small balances and they are getting annoying to pay each month, then the debt snowball method would also be a good fit for you. The debt snowball technique is also a good psychological boost for people that feel discouraged by their debt and bothered by high-maintenance payments. This method is designed to get you fast results when paying off your debt and it will appeal to individuals that get disheartened or upset easily.
What Happens Next –
The debt snowball effect will keep rolling until all of your credit cards are paid off. With the “debt snowball” method, the successes of paying off a credit card occur more regularly throughout the process, meaning it’s better for keeping your encouragement up as you repay, even though you may pay more interest in the long run.
If you have questions about The Debt Snowball Method or you need some help and advice on paying off your unsecured debt, contact us today. We are more than happy to answer any questions, and we want to help you get out of debt as quickly as possible. Call us toll-free at 1-866-699-2227 or visit us online at www.advantageccs.org.