Credit card debt, student loans, mortgages, car loans, hospital bills… debt can feel pretty debilitating. Often times, people borrow without understanding that consequences of all the debt they are getting themselves into. Having to pay five different debts every month can leave you feeling that you are going nowhere and that your debt is just staying the same. The debt snowball method is a strategy that allows you to feel more empowered and more in control of your debt, and allows you to pay it off quicker.
Figure out how much exactly you owe
Before you start paying off your debt, you need to know how much you owe. Sit down, collect all your bills, and get out the calculator. When looking at your debt, there are 3 things you should look for: the first is the total amount owed after interest, the second is the minimum monthly payment, the third is the interest. Once you have those two things you are ready to start saving.
Setting aside debt-money
When creating your monthly or weekly budget, determine how much you are going to set aside for paying your debts. Keep in mind that this where the bulk of your extra money should go to. After you have paid all your expenses for the month, most of that left over money should go towards paying off your debt. You should at least be setting aside enough money to pay ALL of the minimum payments, and then a least $100, but the more you pay off, the quicker you will be debt free. This means that you may have to sacrifice some spending, or even get a new side job, but understand that this is just temporary. If you are having a difficulty budgeting, we have ways to help you. The harder your work, the quicker you pay off your debts, the quicker you can go back to your traditional budget.
How debt snowball works
Now that you have collected all of the information on your debt, and have figured out what money you will set aside, you are ready to start saving. What you are going to do is, first, make all of the minimum payments on all of your debts every month. Then, with the extra money you have to pay your debts, you should apply it ALL towards your bill with the HIGHEST interest rates. Other blogs recommend you tackling the smallest bill first, however, tackling the bill that gains the most interest is more important. The amount you owe isn’t always constant. If your debt has high interest rates like your credit card, your debt will always be growing, sometimes growing even more than the minimum payment you make, meaning that if you take too long paying off other smaller bills, you might come back to an even larger one. By tackling the debts with the highest interest rates first, not only do you eliminate your current debt, but you also eliminate the opportunity for your debt to grow even more. It can be hard to figure how interest rates work, but we explained it for you here. Eventually, you will pay off your first bill, and then move on to the next one, and so on, making sure to always make the minimum payments so that you are not fined. Like building a snowball, you must start small, and eventually build your way up.
Why it works
As mentioned in a lot of other posts, finance is about mindset. Other financial advisors explain that getting rid of a whole bill makes you feel like you are one step closer to paying off your debt. Focusing on just one thing at the time and getting rid of it the fastest way possible. While that is true, the traditional debt snowball model ignores the fact that your debt can grow. Our version of the debt snowball payment model allows you to still pay one bill at the time, but it ensures that you are protecting yourself from even more debt because we focus on making sure that not only are we eliminating your debt, but also that your debt doesn’t grow. While paying one small bill quickly can feel amazing, watching your other debt grow to twice the size of what the small bill was can make you feel like you are taking a step backwards.