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Drowning in debt?
Ok, maybe that was a little intense.
Let’s try this again. Find yourself in debt wasting money each month making minimum payments only to realize the next month that the balance has barely budged?
You’re not alone. In fact, in 2018, CBNC found that “the average adult has about $38,000 in personal debt.” (source)
What if I told you that you could get out of debt fast and spend your money on your heart’s desires? Well you can and this debt elimination strategy is one of the most used methods.
It’s called the debt snowball method.
What is the debt snowball method
The debt snowball method is a debt payoff strategy in which you pay off your debts starting with the debts having the smallest balances moving on to the debts with the larger balances.
It’s most infamously praised by financial guru Dave Ramsey.
After a debt is paid off, that payment is then “snowballed” or rolled into your next debt payment that has the smallest balance. This process continues until all your debt is paid off.
What you need before you begin
The most important thing you need to do before tackling debt using the snowball method is a snowball amount.
Basically, you have to figure out how much extra money you can afford to put toward your debt each month (that’s in addition to your usual monthly payments.)
The best way to do that is to create a budget. This helps you to see where your money is going and how much money you actually have left over after your expenses are paid.
What if you need more money to create a snowball amount
After you’ve combed through your budget to look for hidden money that could be used toward your debt, it’s time to start looking at ways to make extra money.
One of the first things you can do to make money on the side is to evaluate your skills.
What is something that you’re really good at? What is something that people continuously compliment you on and come to you for help with. How can you turn that knowledge and skill into income? What can you charge people for?
Step 1 – List all of your debts
Before you jump into paying off debt, you’ve also gotta know what you’re working with.
First, you want to write down all the debts you know you have.
Then, go through your bank statements to make sure you haven’t forgotten anything. Also, remember to include any personal debt you may owe family and friends. Essentially, you’ll be writing down all your creditors and the amounts you owe them.
Some popular debts the average person has are
- Mortgage loans
- Car loans
- Personal loans
- Credit card debt
- Student loans
- Unpaid bills
Credit Sesame allows you to see your credit report for free which will show you the debts you currently have.
Step 2 – Organize your debts by smallest balance to largest balance
After you’ve written all your debts down, number then from least balance to greatest balance. This will be the order that you start paying your debts off.
Step 3 – Continue making all minimum payments
The entire time you’re on your debt free journey, you’re going to want to continue paying the minimum payments on all of your debts.
We’re not trying to accumulate more debt or make your financial situation worse. Try not to miss any minimum monthly payments.
Step 4 – Use your snowball amount to make extra payments toward one debt then repeat
The amount you initially determined you can afford for debt each month is the amount you’ll use to start throwing at the debt with the smallest balance.
Any extra money you find yourself with should go toward this one debt.
Continue paying toward this first debt until the balance is $0 and the debt is paid off.
Then you’ll repeat this process with the next debt that has the smallest balance.
Comparing debt elimination strategy methods
The best thing about using the debt snowball method is that is allows you to have quick wins. Because of this, your momentum builds. As you see your debts being paid off, regardless of the amount, you’re experiencing success and satisfaction which in turn feeds your motivation.
Most people find this method more beneficial then the debt avalanche method because they can see their efforts paying off and working.
Unfortunately, this method will take you a little longer to become debt free. Depending on your interest rates of the different debts, you may end up paying more money in interest with this method.
However, your quick wins will keep propelling you to continue on your debt free journey while the followers of the debt avalanche method may give up early in their journey due to not seeing their efforts immediately pay off.
In the end, the debt snowballers may just end up paying off their debt faster after all. It’s all in perspective.
Just to recap, with the debt snowball method, your debts are paid off in order from the smallest balance to largest balance.
When you’re done paying off each debt, that payment amount is then rolled into your debt debt.
The process is just rinse and repeat until all your debts are paid off.
Remember, since the overall goal is to pay off debt, don’t continue accumulating more debt. So cut up those credit cards and do whatever you have to do to not create more debt.
If you’ve found this post on the debt snowball method helpful, please share.
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