Debt Snowball – 3 Steps to Pay Off Your Debts
Debt Snowball is a debt management strategy popularized by personal finance guru Dave Ramsey. Statistics say that the average amount of debt held by individual customers in the U.S will cost around 23,325 U.S. dollars in 2021. This survey clearly shows that a considerable number of people are struggling to come out of debt.
Dave Ramsey and other personal finance professionals like to discuss snowballing debt as a viable debt repayment strategy for those who are looking to get out of oppressive debt situations.
But what does it mean to debt snowball? How does it work? And should you snowball your debt to get ahead financially? Let’s find out.
What Is Debt Snowball?
Debt Snowball is an initiative to pay off all your loans starting from making payments on the smallest of all. This is a way for people to pay down their loans even if they only have a certain amount of money to budget each month for debt repayment.
Why Use Debt Snowball?
Snowballing your debt is kind of a motivational program. When you see debts disappearing from your credit account, you will develop the motivation of removing all your debts step by step. This method is really helpful when you are left with multiple credits unpaid and you are wondering where and how to start. Starting with paying your smallest debt will help you to easily pay off the first debt.
Steps to SnowBall Your Debts
The way it works is that you pay down the smallest balance first, then work your way up to paying down larger balances. To start snowballing your debt, there are a few simple steps:
List Your Debts
Make a list of all your debts. List them from smallest amount to largest. Make sure not to include mortgage loans in this list as they are depended on collateral security.
Make Small Payments
The next step is to figure out the smallest one. On this smallest debt, pay as much as you can. Also, make smaller payments on all other loans. Keep doing this until your first smallest loan is paid off completely.
Repeat the Process
Now move to the next smallest loan and try paying the maximum of that. Meantime also focus on paying the smaller part on other loans as well. Repeat it till all your debts or paid off.
The reason it works is that as you pay off each item, you can allocate the money that you were using toward paying off the last piece of debt. As a result, when you go to your final large debt, you’re able to allocate a lot more money to pay it off.
How You Should Snowball Debt
Don’t start debt snowball until you have a stable financial situation with a $1,000 emergency fund. It’s more important for you to have cash ready in case of a catastrophe than it is for you to pay back the debt that you can pay the minimum on.
Aim to increase your available income. Getting a second job, starting a side hustle, and cutting unnecessary spending are all excellent ways to find more money to allocate toward debt repayment.
Leave out your mortgage, as you end up refinancing it every several years anyway. Instead, focus on a credit card, medical, car loans, student loans, and other personal loans you may have.
If you can’t pay all your minimums, look into refinancing and consolidation to try and reduce your payments and overall debt burden. However, make sure you do the math: refinancing and consolidation could end up costing you money.
Accelerated Debt Repayments Plans
People usually confuse debt snowball with Debt Avalanche because both of them has some similar process. Both the process includes listing the debts and making minimum payments on them. But they vary in the case of time and interest rate. When the snowballing method focuses on paying off debts irrespective of interest rates, the debt avalanche focuses on paying off debts of higher interests first.
When To Choose Debt Snowball Method?
- If your credit account has many small debts, debt snowball will help you pay them off one by one.
- If all your debts have similar interests, choosing the smallest debt will not affect you.
- If you are loaded with more number of debts, this method will help you minimize the debts by paying off simpler debts to complex ones.
When Debt Snowball Becomes Impossible
If you’re in far too much debt and are unable to cover the minimum payments, then this method for repaying debt becomes impossible. You must be able to make at least the minimum payments for this to work. It must also be mentioned that you should have a predictable income, otherwise you will not be able to use this method for paying down debt.
Many people choose bankruptcy in this situation. However, in many cases, you can get your debt reduced by negotiating with the lender.
Don’t spend time worrying about your debt: instead, make a plan to tackle it. Start by reducing your overall debt burden if possible. We wrote an article about debt consolidation and how it might be able to help you. Then, negotiate with lenders to see if you can start paying your debt with lower payments.
Frequently Asked Question
1. What are accelerated debt repayment methods?
Accelerated debt repayment methods are the methods that are focused on paying off debts with constant methods. Debt Snowball and Debt Avalanche are the two popular accelerated debt payment methods.
2. Is debt snowball worthy?
When debtors are left with no clue how to handle multiple debts, this debt snowball method will help by making them take the first simple step. Though the steps are smaller and simple, over some time they become huge and relieve people from debt.
3. What are the steps in the debt snowball?
- List all the debts from lower to higher balance.
- Choose the smallest and pay off as much as you can along with smaller payments on others.
- Complete the smallest and target the next smallest by repeating the process till you pay off all debts
If you are overwhelmed with multiple loans! Sometimes multiple small debts can trouble you and leave you in a blank state not knowing how to deal them together. If this is your state, choose snowballing technique to repay your loans from smaller to larger, so that paying off some loans irrespective of their interests will keep you hopeful and help paying off others as well.
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