Drowning in an avalanche of debt?
Looking for a debt reduction strategy that doesn’t involve fees or consolidation?
The snowball method of debt reduction is a tried and true way to get out of debt. You can do it yourself without consolidating or going into more debt to dig yourself out.
The Snowball method of debt reduction involves paying the minimum monthly balance on all of your debts, except for one. For that special one, you consistently pay extra each and every payday.
Once that debt is paid off, you apply your repayment amount to the next debt, adding it to the minimum repayment and so on, snowballing your repayments until all your debts are paid off.
Check out how it works in detail below.
How to Use the Snowball Method to Get Rid of Debt
Your first step is to list all of you debts, the balance, the interest rate and the minimum monthly repayment. Here’s an example:
Next, you need to work out how much you are going to budget for debt reduction over and above your minimum payment amount.
Don’t make the mistake of throwing all your spare cash at your debts. In order to stay out of debt, you need to be building your savings so you don’t need to rely on your credit card when future expenses crop up.
Start with your savings plan first, work out your weekly expenses and then work out how much extra – that is how much more above the total minimum amount you have to pay that you can afford.
If you’re interested in going into detail how to create a savings plan, work out your expenses and draw up a game plan for your money for each payday that includes the snowball debt reduction method, check out the Plan Save Thrive eCourse here.
In the above example, the minimum repayment total is $339 a month. Just say I decide you can find an extra $60 to put towards Credit Card 2 (I’ll explain why I chose that one below) to round up the monthly payment to $399.
So, every month I continue to pay the minimum amount on each debt except for Credit Card 2. I’m going to ensure I actually achieve this by automating the repayment to come out every payday before I have time to spend my pay.
Once Credit card 2 is paid off, you then add it’s repayment amount to your next debt.
So in this example, our repayment for Credit Card 1 is bumped up to $95, and we’re still paying a total of $399 a month.
Finally, once Credit Card 1 is paid off, we apply the $95 to the Car Loan, paying the full $399 towards the car loan.
At each step of the way, automate your repayments using your bank’s online scheduling. No need to find motivation, no need to worry about transferring money, you’ve got it covered. You can even set an end date for your scheduled transfers for when you know you’ll have paid off your debt.
As the repayments compound, the debt reduction accelerates, saving you time and interest. And once you’ve paid off your debts? You can add the $800 to your mortgage repayments or build your savings account.
Which Debt Should You Pay Off First?
Your first impulse might be to pay off the debt with the largest interest rate – after all, won’t that save you the most money?
But here’s why that might not be such a great idea.
Paying off debt can be a long-term process and everyone can use a boost of motivation on the way. By paying off your smallest debt first, you’re giving yourself that essential motivational boost that can keep you going for the long haul.
Once you knock a debt out, you might then choose to use this quick boost in motivation to then tackle the highest interest debt next. Because you’ve snowballed the repayment, you’ll knock this debt down at a quicker rate, keeping the motivation momentum going.
The one caveat to this is that if you have pressing debts, ones where you’re getting angry letters, or debts to family or friends that are putting a strain on your relationship, then it’s a good idea to focus on these debts first.
Don’t despair if your debt is getting you down. Use the snowball method, along with other debt reduction strategies to get rid of debt and stay out of debt for good.