You may have heard the word “snowball” referring to paying off debt. Perhaps you have heard friends and colleagues talk about it, or maybe you have listened to Dave Ramsey preach the benefits of using this method. Today’s topic involves using one or another debt payment snowball strategy that has been used many times to free people from their debt.
The “Snowball” is a metaphor to describe the process of paying off your debts, focusing on one debt at a time and adding the money that you were using to pay one debt to the amount that you have available to pay off the next debt. As you do this, your total payment amount toward your debts grows and grows, hence the metaphor “Snowball.” To “Snowball” your debts, you focus on one debt at a time. Choose a debt as your target and pay as much as you possibly can on that target debt until it’s paid off. Then target the next debt. Keep your payments on your other debts sufficient, but low, until it’s their turn. Take the new money that was freed up from the previous debt and add it to your regular payment on the next target debt. The amount of money available for your next target debt should increase each time you extinguish a debt. For this to work, you have to RESIST THE TEMPTATION to increase your lifestyle. By keeping the focus on your debts, you should be able to significantly increase the amount you’re able pay toward your next target debt.
There are 2 Kinds of Debt Payment Snowball strategies:
- Attack the debts with the Highest Interest Rate (most efficient, yet more difficult)
First, if you have a decent amount you can afford to pay toward your debts, you may want to attack and pay off the debt with the highest interest rate first. Then attack and pay off the debt with the next highest interest rate. This is the most efficient and fastest way to get out of debt, but because paying off large debts early in the snowball process can take a long time, especially with smaller payments, many people get discouraged and give up. This approach is good if you can afford to make good size payments so that you can see enough progress to keep you committed.
- Attack the smallest debt (less efficient but easier and more motivating)
The second kind is to attack and pay off the smallest debt first, regardless of the interest rate, and then work up to the next smallest debt. This is less efficient but may be easier, more motivating, and may have a higher chance of success because you may see results right away. If your available money for debt payoff is really low, you may choose this method because you may be able to pay off at least one debt sooner and free up at least some money to start your snowball growing. This is very exciting. By paying the smaller debts first, your snowball will gradually get larger when it comes time to smash that big debt at the end. This approach is good if you can only afford small payments at first and need to see some progress in order to stay committed.
Both approaches can be effective. You just need to know yourself and know what it takes to keep you committed. The important thing here is to STAY COMMITTED and experience the thrill of extinguishing a debt.