Debt is a shared burden worldwide. It’s like a virus. If anybody is in debt then they’re going to have a hard time repaying it. But there’s something we can do about it. There are a few strategies from which we can pay it faster. The one we are going to talk about is the Debt Snowball method.
A quick description of the Debt Snowball Method is that you pay off your smallest debt first and then apply the payments you were using toward that to pay the next smallest debt. This strategy allows you to build momentum or “snowball” your payments as you pay off each debt.
What is the Debt Snowball Method?
The Debt Snowball Method was originally made popular by personal finance expert Dave Ramsey. This method excludes your mortgage. It focuses on paying off your smallest debt balances first while making minimum payments on all other debts.
Once the balance is paid off, you take the funds you had previously allocated to your smallest debt and put them towards your next smallest balance, essentially building, or “snowballing,” your repayment toward the next balance. This cycle repeats until all of your debt is repaid.
All you need to have is patience. It’s a debt-repayment method that may not save you money on interest but could be a great motivator to keep paying off your debt.
How to use the Debt Snowball Method?
The way to use this method is amazingly easy. In this article, this method is broken into four simple steps:
Step 1:
Open any spreadsheet software like MS Excel or you can also use a note copy. Create a list of all your debts, excluding your mortgage. Sort the debts in order from smallest to largest balance.
Step 2:
After you’ve completed step 1, the next thing you need to do is, pay the minimum amount on each balance, except the smallest one each month. Put as much cash as you can toward that one.
You’ll want to review your budget and figure out how much money you can put toward your smallest balance without jeopardizing the rest of your finances.
Step 3:
Now that you’ve paid off the smallest balance, roll the extra money you were using for that balance into the monthly payment for the next-smallest balance. Of course, you have to continue making the minimum payments on all other debts.
Step 4:
Now repeat this process until you’re debt-free.
Advantages of The Snowball Method.
The main advantage of the Debt Snowball Method is a psychological boost. When you see debts disappearing, it can increase your motivation to continue paying off debt. And even if you’ve only paid off a small balance, your confidence in the progress you’re making grows.
This strategy may help you to get a better handle on your finances and also your stress. Since this strategy is based on focusing on one debt balance at a time, it eliminates worry about how to pay off all of your debt at once.
Disadvantages of The Snowball Method.
The Debt Snowball Method also has a few demerits like the potential for paying more money in interest over time than if you used another debt-repayment method. Since the debt snowball method focuses on the smallest debt balances rather than the balance with the highest interest, your costliest debt may get paid off last.
If you find that the snowball method may cost you too much money in the long run, this strategy may not be the best fit for your debt-repayment needs. Instead, consider the avalanche method — which focuses on paying your highest interest balances first.