A Guide to the Debt Snowball Method. Today, more people than ever before are in debt. Whether you’re dealing with car finance, credit cards, personal loans, or payday loans, mounting debt can have a significant impact on your everyday life and seriously contribute to your stress levels. Maybe you feel like you’re never going to get out of debt. Even when you’re making payments every month, perhaps it’s frustrating because none of your debts ever seem to get paid off. The debt snowball method is a way to start seeing instant results. Here’s what it is, and how you can use it to clear your debts for good.
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What is the Debt Snowball Method?
Picture a small snowball rolling down a hill. As it continues to roll down the hill, it picks up more snow, as it goes along and gets bigger and bigger until reaches the bottom of the hill. Finally, it becomes so big that it’s bigger than you.
This is the idea behind debt snowball. This strategy involves paying off your debts starting with the smallest balance and ending with the largest. As you pay off each balance, you can use the extra money that would normally be paid towards the first debt to pay towards the next balance instead. And as you continue paying off each balance, you will have more money to pay off the next.
How Does the Debt Snowball Method Work?
The first thing that you will do with the debt snowball method is start out with aggressively paying off the lowest balance with any additional money. You will need to work out your disposable income and use as much of it as you can to pay off the balance on your smallest debt in order for the debt snowball method to work well.
By paying as much as you can afford to the smallest debt that you owe, you can get it paid off much faster compared to only making the minimum payment. Then, once you have cleared the balance and have no payments left to make, you can take the money that you have been paying towards that balance and put it towards the next debt up instead, along with the minimum payment that you have been making. As a result, you will then be able to clear your new smallest debt off much faster and repeat the process with each debt until you are finally paying off the largest one. Remember that it is important to continue making at least the minimum payment on all of your debts while aggressively paying off the smallest one, to avoid falling into financial trouble or causing damage to your credit score.
Benefits of the Snowball Effect for Debt:
One of the main benefits of using the snowball method for paying off debt is that it allows you to clear your debts much faster compared to only making the minimum payment to each debt every month. It can also work out much cheaper for you over time since the interest that you will pay for the debt will be lower if you are paying the debt off faster with more than the minimum payment, particularly when it comes to credit cards.
Once you are able to pay off the smallest debt, which is often the hardest part, you will be able to create a momentum that will keep going until your largest debt is repaid, if your financial situation stays the same.
Paying off the First Debt
Repaying your smallest debt is often the most difficult part of the debt snowball method. After all, if you are struggling with debt, you might not be able to aggressively repay any of your debts off right now. So, it’s important to prepare and perhaps even make sacrifices to make it easier for you to pay off just the smallest debt, for now. It is definitely worth taking the time to look through your regular payments to see where you may be able to save some money that could go towards your debt instead. Perhaps you have subscriptions that could be put on hold, a gym membership that could be replaced with home workouts, or contracts that you could downgrade to save some extra money. The more disposable income that you can find to put towards your smallest debt, the better since this means that you can get it paid off sooner and benefit from more cash freed up to pay off the rest of the debt.
How to Approach the Debt Snowball Method:
Most people who resort to using the debt snowball method have reached a point in their life where their biggest priority is getting out of debt. Perhaps you are struggling to save, stress levels are mounting because of the number of debt payments that you have to make each month, or you are worried about your credit score. For the debt snowball method to have the desired effect, you will need to approach it with an intensely focused and motivated attitude. The good news is that once you have been able to clear the smaller debt balances, you will build up the financial and emotional motivation to continue paying off your debts and start clearing the larger ones, especially as you free up more and more cash to pay towards them.
Why Does Debt Snowball Work Well?
Many people do not realise that getting out of debt and staying out of debt is more about their mindset and psychology than their financial situation. If you have been in debt for a long time, you might have forgotten how it feels to completely clear a balance. Even if it’s just one loan or credit card, it provides a psychological sense of achievement and satisfaction that is hard to deny feels absolutely awesome.
This is one of the reasons why the debt snowball method works so well. Each time you repay a debt balance, you’ll feel absolutely amazing. It makes you feel accomplished and proud of yourself, and your brain will remember that feeling and want to get more of it. It makes you feel like if you can clear off this credit card or loan so quickly, there’s nothing stopping you from tackling the next one. Several studies have shown that immediate results are one of the best ways to boost your motivation, so simply seeing your debt balances go down and getting those emails to inform you that your balance has been paid off can be the main motivating factor that keeps you going while using this method.
Does the Method Have any Disadvantages?
While the debt snowball method definitely has a lot of advantages, there are also some cons to be aware of before you give it a try. Like anything in life, there are some disadvantages to be aware of, and getting the full picture will help you determine if it is the right option for you when it comes to paying off your debt.
First of all, this method will only work if you have multiple debts to pay off, but more importantly, there is the issue of interest. Since the debt snowball method focuses only on repaying the lowest balances, it does not take into account which debts have the highest amount of interest. As a result, you could end up paying thousands of pounds of interest on the other balances while you are clearing the smallest ones. In some cases, it makes much more financial sense to pay off the cards with the highest interest first since clearing them will be much cheaper than paying the minimum payment on them while clearing the smallest debts. And all the additional money that you’ll save by paying off the high-interest debt first could be put towards repaying the other debts.
If your situation looks like this and you would rather clear the highest-interest debts, you might want to look into the alternative option, the debt avalanche method, which takes care of the debts with the highest interest rates first.
The Debt Snowball Mortgage Strategy
If you are currently paying off a mortgage along with several smaller debts like credit cards and loans, you might want to consider using the debt snowball method to repay your mortgage faster. By repaying the smallest debt first then using the additional money that you save to pay off all the other debts in order of size until you are finally left with only your mortgage, you can free up the money that would normally go towards your other debts to make overpayments on your mortgage instead.
Is the Debt Snowball Method Right for Me?
Motivation is often more important than finances for people who are trying to manage or get out of debt. And many people who have used this method will agree that the debt snowball method is one of the best ways to get out of credit card debt and other forms of personal debt. If you work better when you know that your efforts are making a difference and getting you somewhere when it comes to your debt, the debt snowball method might be the ideal choice for you.
Many people have been struggling with debt for so long that they’ve forgotten how it feels to completely pay off a balance. If this sounds like you, the debt snowball method could be the perfect option for you. Once you have paid off your smallest balance, you will get a small taste of being free from debt – something that you’ll definitely want to get more and more of over time. Remember that the longer you keep making the minimum payment on credit cards and personal loans, the longer you’ll be in debt and the more interest you will pay.
If you are struggling with personal debt and find it hard to see a way out, the debt snowball method could be ideal for you.