The debt snowball method is one of the most effective methods for paying off personal debt, period. Instead of taking a purely logical approach, the debt snowball approach actually makes the whole process of paying off debts much more psychologically easy and satisfying.
Here’s how the debt snowball works.
An Overview of the Process
Take out an Excel spreadsheet and list out all your debts. Make sure to include the name of the creditor, the amount you owe, the annual percentage rate, the monthly minimum payment and the payment date for each debt.
Sort your list by the total owed. The smallest debt is the debt you’ll work on first. Unlike other systems which advocate paying off the highest interest debt first, the debt snowball method works by paying off the smallest debt first.
This works because paying off that small debt gives a real sense of achievement. That momentum and enthusiasm can be channeled towards paying off the next largest debt, then the next and so on and so forth.
But that’s not all.
You start by paying off the smallest debt. You do so by paying as much extra towards the debt as you possibly can, while still making the minimum payment on every other debt you owe.
Let’s say the minimum payment for your smallest debt is $100 a month. You decide you can put an extra $200 a month towards that debt as well to get it paid down as quickly as possible.
Once the debt is paid off, however, you now have that $200 a month plus the $100 a month minimum payment that you can now put towards your second smallest debt. Let’s say that debt’s minimum payment was $150.
Once that’s paid off, you now have that $150, plus the $300 from earlier that you can now put towards your third largest debt.
In this manner, the payoff process effectively “snowballs” until you have an incredible amount of momentum and financial power that goes towards paying off your debts.
A Few Things to Note
There are a couple things to keep in mind with the debt snowball method.
First of all, some lenders will try to apply any extra amount you pay to your next month’s payment instead of applying it towards your principal. Make sure you talk to your lenders to make sure your extra payments are paying off the principal.
Second, the debt snowball method is much more of a psychological approach than mathematical. However, debt repayment is often much more about keeping your spirits up than strict math. Try the system for a few months to make sure that it’s really, truly working for you. If it is, then commit to sticking it through until completion.
Finally, and this might go without saying, as soon as you start this process you absolutely must put away all your credit cards. There is no sense in starting this process if you’re going to rack up debt along the way.