Having too much debt can cause various negative emotions ranging from denial and stress to anger and depression. Good thing the answer is simple—get out of debt. However, although the answer is simple, it’s not easy to do. To make getting out of debt easier, considering following the debt snowball method.
What is the debt snowball method?
To create a huge snowball, you start with a compact little ball and roll it across the yard until it gets bigger and bigger. In much the same way, the debt snowball method refers to paying off your smallest debt first while paying the minimum payments on the larger ones. Once you’re finished with the smallest, you can then repeat the process until you’ve finished paying off all your debt.
For example, consider that you have the following debt:
- Debt A: $500 ($25 minimum payment)
- Debt B: $1,000 ($100 minimum payment)
- Debt C: $9,000 ($200 minimum payment)
- Debt D: $15,000 ($150 minimum payment)
If you apply the snowball method in this situation, you’ll pay all of the minimum payments on Debts B, C & D ($450/month) while paying as much money as you can into Debt A. Once Debt A is fully paid off, you have one less monthly minimum payment to pay which you can carry over into your repayment of Debt B. You’ll continue this process until you find yourself debt free!
In short, all you have to do is:
- List all your debts from smallest to largest
- Pay all the minimum amounts except on the smallest debt
- Pay as much as you can on the smallest debt
- Repeat the process
Why does it work?
You might ask “why should I pay off my smallest debt when my larger debts have higher interest rates?” Well, the debt snowball method is effective because it’s more about behavior modification. It’s easy to lose the desire to continue making payments when you keep on working and spending all your money on paying off the huge debt first, and still not feeling like you’re making major progress.
If you do the snowball method it doesn’t matter if you start small because as you slowly pay off each debt, you gain the motivation to continue until all debt is gone. You also learn how to pay bigger amounts to the larger debts instead of spending your money on unnecessary things whenever you clear a small debt.
Try this method and see for yourself!