Debt Snowball Method
Getting rid of debt can seem challenging, especially when you have accumulated a large amount of it. However, there are strategies that you can put in place to help you in getting rid of this debt. One method that many people rely on is the snowball method. The debt snowball is a strategy in which you pay off all of your debts in order from the smallest debt to the largest debt. By following this method, you will have a great chance of paying off your debt.
How Does the Debt Snowball Method Work?
With the debt snowball, you gain momentum as you pay off each debt. By starting with the smallest debt, you will be more motivated to pay off the other debts. The first step is to make a list of all of your debts and list those debts from smallest to largest. The second step is to make minimum payments on all of your debts with the exception of the smallest one. You should devote all of your extra money to paying off the smallest debt. By attacking the smallest debt, you will get it paid off much sooner. Once the smallest debt is paid off, you will begin paying on the second smallest debt. Whatever money that was being paid on the smallest debt should now be devoted to the second smallest. You should repeat this step until all of the debt is eliminated.
An example of the Debt Snowball Method
Let’s assume you have the following four debts:
1. $500 installment loan ($50 monthly payment)
2. $2,500 credit card debt ($63 monthly payment)
3. $7,000 medical bill ($135 monthly payment)
4. $10,000 car loan ($96 payment)
If you choose to use the debt snowball method, you would make the minimum payments on all of these debts with the exception of the $500 installment loan. Also, with this specific example, let’s assume that you pick up a side job in which you bring home an extra $500 a month.
Since you will take the extra money ($500 a month) and the minimum payment of $50 to apply to the installment loan, you will have that bill paid in one month. You would then take the $550 payment and apply it, along with the minimum payment of $63, to the $2,500 in credit card debt. Therefore, you would be paying a total of $613 to the credit card debt, which would allow you to pay off that debt in about four months. Now you will take that $613 and add the $135 monthly payment to the medical bill. In about 10 months, that bill will paid off as well. Once you reach the $10,000 car loan, you will be able to put $844 toward it, and this will allow you to pay it off in about 12 months. As a result, you will have eliminated approximately $20,000 in debt over the course of 27 months.
With the debt snowball, you are more likely to succeed than with other methods. The snowball method is about behavior, and by following this behavior, you can get your debt paid down successfully.