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Get Out of Debt With The Snowball Method



The Debt Snowball Method

The debt snowball method is an effective method for paying off personal debt. The snowball method makes the whole process of paying off debts much easier and psychologically satisfying. Here's how the debt snowball works.

A Quick Overview of the Method

First, open up a spreadsheet and list out all your debts. You can use any spreadsheet program. Include the name of the creditor, the amount you owe them, the annual percentage rate being charged, the monthly minimum payment, and the payment date for each account.

Sort your list by the total you have left owing. You will be working on the smallest debt first. Unlike other systems that advocate paying off the debt with the highest interest first, the debt snowball method works by clearing the smallest debt first.

Paying off that first small debt will give you a sense of achievement. Then that initial momentum and enthusiasm can be channeled towards clearing the next largest debt, then the next and so on and so forth.

You will start by clearing the smallest debt by paying as much extra cash as you can towards the debt as you can possibly afford, whilst still making the minimum payment on every other debt.

Let's say the minimum payment for your smallest debt is $100 a month and you decide that you can afford an extra $200 a month off that debt to get it paid as quickly as possible.

Once the first debt is paid off, you will have that $200 a month plus the $100 a month minimum payment that you can use towards paying off your second smallest debt. Let's say that debt's minimum payment was $150.

When that debt is paid off, you will have $150, plus the $300 from the debt that you have already paid off that you can now put towards settling your third-largest debt.

By using this system, the paying off process effectively "snowballs". Each time you pay off one debt you will have much more to pay off the remaining debts. This will give you an incentive and an incredible amount of momentum and financial power that will allow you to quickly clear all your off your debts.

You will need some willpower to reserve the cash to pay off the first debt, but once you get used to making the payments it should be fairly easy to clear your debts in a reasonable amount of time.


Keep Points in Mind When Using the "Debt Snowball Method"

There are a few things that you must keep in mind when using the debt snowball method.

  1. Some lenders will try to apply any extra cash that you pay to your next month's payment instead of taking it off of your principal balance. You must make sure you speak to the lenders, tell them what you are doing, and make sure all your extra payments are going towards paying off the principal amount.
  2. The debt snowball method is more of a psychological approach than a mathematical method. Debt repayment is often much more about keeping up your enthusiasm, incentive, and momentum. Give the method a few months to get going. Don't give up too soon. If it is working for you, then commit yourself to it and see it through until completion.
  3. During this time you must make sure that you don't increase your debts by using your credits cards etc. In fact, you should cut up your cards so that you can't use them. Don't try to close the accounts because you won't be able to make any payments and the creditors would probably pass your debt to a third-party collection agency. Which is something that you don't want to happen because you will have to negotiate with another company that may prefer to take action against you.
This is just a quick overview of the "Debt Snowball Method", but as said previously, it is a very effective way to clear up your debts and start relaxing and living again.

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