Pay Off Your Debts with the Debt Snowball Method
In debt? You’re not alone. Australians rank fourth highest in the world in the amount of debt they owe, according to the Organisation for Economic Co-operation and Development.
If you’re overwhelmed by the amount of debt you owe and are ready to pay it off, consider the debt snowball method.
The debt snowball method is named such to depict a snowball rolling down a hill. At the top of the hill, the snowball starts off small, but by the end of the hill, the snowball has grown in size.
This applies to how you’ll pay off your debt, as you start by paying off smaller loans and your money momentum grows to pay off larger loans, with your freed-up money growing like a rolling snowball.
You’ll pay off all of the smaller bills first, regardless of the interest rates, before moving onto the next debt and so on until all your debt is paid off.
How to Start the Debt Snowball Method
Start by listing all your non-mortgage debts from smallest to largest, including the minimum payment and the total amount you owe. Non-mortgage debts include store cards, credit cards, personal loans, medical bills, car, etc. Do not include interest rates in your list, as you will pay off the smallest loan first, no matter how much interest you’re being charged.
Millions of people around the world have used the debt snowball tactic to beat debt.
Make minimum payments on all debts except for the smallest debt, where you should put as much extra money towards. You may have to make a budget to determine how much extra money you can apply towards that debt. Create a budget by tracking your saving and spending habits from the last few months. By seeing where your money goes, you’ll be able to determine what expenses you can cut out and put towards paying off debt.
After the first smallest debt is paid in full, you add its minimum payment and the extra money you have dedicated to debts to paying off the next smallest debt. Continue paying off debts and adding the additional money to the next debt until you have paid off all your debts.
How the Debt Snowball Method Works
Although it might seem logical to start paying off debt with the highest interest rate first – as it is the most expensive. The debt snowball method relies more on human psychology and little wins to create momentum. The method focuses on behavior modification. Since you’ll see fast results, you’re more likely to stick with the relief strategy.
If you start off by paying off larger loans, you’re less likely to see progress and more likely to quit. By seeing fewer bills, you will feel more positive about the progress you make, even as you’re paying off larger debts. If you know seeing positive results quickly will make you feel more motivated to continue, then the debt snowball method is for you.
With this positive momentum, it helps alter your behavior and thoughts about money. Paying off debt will become a priority for your financial well-being, and you may become more conscientious before making purchases. The goal is to become debt-free, so you may have to cut out certain activities for a while, such as eating out, traveling or shopping in order to reach this goal.