The debt snowball method is a system that concentrates on paying off debts with the lowest balance first. The idea is that you’ll be able to clear your smallest debt the quickest. This allows for a quick win, which can keep you motivated to continue paying off your debts. Once you pay off the smallest debt, you then move on to focus on the next smallest debt.
This is a popular and effective approach to paying off debt. Although it excludes mortgage loans, the debt snowball method can generally be applied to all kinds of liabilities, including car loans, student loans, credit card bills, and more. Learn more about how it works and how you can implement it below.
The snowball method is a debt repayment strategy that prioritizes paying down your smallest debts first. Every month, you would pay the minimum payment on all of your debts. Then, any extra money you have left for additional payments goes toward the debt with the lowest balance. This is going to be the easiest debt to clear first. Once you’ve paid it off, you move to the debt with the next smallest balance.
From auto loans to personal loans, taking on debt at some point in your life is almost inevitable. The odds are you have more than one type of debt you need to make monthly payments on. The snowball debt payoff method is great for people who have multiple types of debt with different balances. You can use it to prioritize your debts, making it easy to know which one to pay first.
The debt snowball method has a few key advantages that make it popular for people trying to cut debts:
The psychological benefit is one of the biggest assets of the snowball approach, but the method does have drawbacks. For example, by prioritizing the smallest debts instead of those with the highest total interest, you’ll allow your high-interest debts to grow and might end up paying a larger total amount back to lenders. This can also mean that it will take longer to become debt-free.
That said, when it comes to paying off debts, the key to success is finding a strategy that works for you. Compared to the debt snowball method, other approaches — like the debt avalanche method, which tackles high-interest debt first — may make more sense from a numbers standpoint.
Since you pay off debts with the highest interest rates first, you’ll presumably pay less in the big picture. However, paying off debt isn’t just a numbers game. It’s also a psychological game — and that’s where the debt snowball method gains big points. Read on to find out how you can make it work for you.
Think the debt snowball method might be for you? You can implement it immediately. It shouldn’t take you more than 30 minutes to calculate your snowball debt and get a debt payment plan set up. Here’s how it’s done.
Start by making a list of all of your debt accounts. These could include student loans, auto loans, personal loans, and credit card debt (again, mortgages are excluded from the debt snowball method). Next, check the current balance on each of your debts. This will help you determine the first debt to tackle (the one with the lowest dollar amount balance).
Here’s a simple example:
Next, check the interest rate for each of your debt accounts. While the snowball method doesn’t prioritize a payment schedule on the basis of interest, this can still impact the total balance of your accounts and the payment amount due each month. Continuing with the above example, here’s what this could look like:
Using the information above, you can set a payment schedule and determine which creditor to pay first. Since your car loan is the smallest, start here. After you’ve made the minimum monthly payment on each of your loans, put your extra cash toward the car loan.
Once you pay off the smallest debt, you’ll move to the next one. In this case, once you finish with the car loan, you’ll roll over the extra money you were putting toward that debt each month and now use it to pay off your credit card. Once that debt is paid off, you’ll tackle that pesky student loan.
The snowball method is one effective way to pay off debt. Eliminating your smallest balance quickly and then moving on to the next debt can be a great motivator and can empower you to continue on your journey toward becoming debt-free. There are also other approaches to debt reduction you can explore, like debt consolidation or refinance options.
Whatever path you choose, eliminating debt is one valuable component of improving your money management and overall financial health. A holistic approach to greater financial freedom also involves investing your money to make it work for you and earning more, ideally through diverse income streams. You can find out how it all works with the “I Will Teach You to Be Rich” book.
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