There's no real secret to debt reduction, but sticking to the program is the key.
If you are looking for a solution to get out of debt fast, you’ve come to the right place. Now, there are many articles and readings online that speaks of the “snowball” method. The name itself may seem a bit funny and you may be wondering to yourself what does snowball has to do with financial debt elimination. Well, you will be surprised to find the analogy is pretty relevant.
Snowball for Debt-reduction?
When you think of a snowball, you know that it starts small before it can become large. Large enough to be rolled down the hill. As it gains momentum, your snow ball will eventually become a large snow boulder.
This is a debt-reduction strategy where you pay off debt in the order of smallest to largest, gain momentum as you keep tackling each debt one-by-one.
How does it work?
The debt-reduction strategy focuses on building confidence as each debt is being tackled. Here are the steps to implement the Snowball strategy:
- List all of your debt from starting with smallest to largest. Do not worry about the interest rate.
- Make minimum payments on all of your debts, except the smallest.
- Pay as much as you can afford for the smallest debt.
- Repeat this process for all of the debt until it’s gone!
Why does it work?
The snowball method works because it’s about changing habits and your behavior. Controlling your spend and having a way to manage your finances will effectively help your financial situation.
The hardest part of this is sticking to the program and staying motivated. By tackling the smaller debt first, it will provide faster excitement that will drive you to keep going. If you start with the highest debt with the highest minimum balance it will be a long time before it disappear. Then you will start to lose motivation when you don’t see the balance come down fast enough.
If you are in denial, then ask yourself why you are in this situation to begin with? The answer is most likely habit and behavior.
Once you have gotten a couple wins under your belt, you will get the hang of it and managing your debt will be much easier. The first step is to condition your mind to focus on the bigger picture. Make sure you are not incurring more debt as you’re trying to pay down your existing debt.
Example of the Snowball Method in Action!
The easiest way to learn and understand is to put the Snowball method into action! Let’s say you have the three different debts:
- $500 dental bill – $25 minimum payment
- $1,000 credit card debt – $150 minimum payment
- $3,000 home repair bill – $265 minimum payment
Using the snowball method, you make minimum payments on all the debt, except the lowest ($500 dental bill). Let’s say that with your income, you had an additional $250 extra at the end of each month after paying all the minimum payments. At this pace, you will be able to pay off the dental bill in two months. This is very exciting and you’re ready and motivated to tackle the next debt!
Your next focus would then be the credit card which you can roll the $275 which you were paying on the dental bill plus the $150 which you were currently paying. This means you can afford to put down $425 now towards the credit card debt. Considering you’ve been making minimum payments on the credit cards in previous months, you should be able to pay down the $1,000 in less than two months time.
Remember, the key is not NOT to incur anymore debt or you will be in a vicious cycle.
Now once the credit card debt is paid off, you have freed up $425 plus $150 giving you a total of $575 to focus on the home repair bill. The home repair bill would be paid off in less than 5 months.
Sure it’s not easy, but accomplishable if you change your habit and stay motivated!