- The debt snowball method prioritises paying off small debts first.
- It provides psychological motivation by celebrating small wins.
- As each debt is paid off, the freed-up funds are directed towards the next debt, accelerating the debt repayment process.
How does the debt snowball method work?
The debt snowball method follows a step-by-step process to help individuals pay off their debts effectively:
1. List your debts: Start by listing all your debts, including credit card balances, personal loans, or any other outstanding debts. Include the total amount owed and the minimum monthly payment for each debt.
2. Order by size: Arrange your debts in ascending order based on their outstanding balance. The smallest debt should be at the top of the list, while the largest debt is at the bottom.
3. Pay minimum payments: Make the minimum monthly payments on all your debts to ensure you're meeting your obligations.
4. Extra payments: Allocate any additional funds you have towards the smallest debt on the list. This could be from your budget, side gigs, or cutting back on expenses.
5. Celebrate small wins: As you pay off the smallest debt, celebrate the achievement. This boosts motivation and encourages you to continue with the debt snowball method.
6. Roll over payments: Once a debt is paid off, take the money that was being used for its minimum payment and add it to the minimum payment of the next smallest debt on the list.
7. Repeat the process: Keep repeating the process until you have paid off all your debts, using the momentum gained from each debt elimination to accelerate your progress.
Real-world example of the debt snowball method
Let's say you have three debts: a credit card with a £500 balance, a personal loan with a £2,000 balance, and a student loan with a £10,000 balance. Using the debt snowball method, you would focus on paying off the credit card first, regardless of its interest rate.
You make the minimum payments on the personal loan and student loan while allocating any extra funds towards the credit card. Once the credit card is paid off, you celebrate the accomplishment and move on to the personal loan. By adding the amount previously used for the credit card payment to the minimum payment of the personal loan, you increase the amount directed towards its repayment. This process continues until all your debts are eliminated.
Final thoughts on the debt snowball method
The debt snowball method is a debt repayment strategy that prioritizes paying off small debts first to build motivation and momentum. By celebrating small wins and gradually moving on to larger debts, it provides a sense of achievement and encourages progress.
While the debt snowball method may not always be the most cost-effective approach in terms of interest savings, its psychological benefits can be empowering and effective in helping individuals stay motivated throughout their debt repayment journey. Remember, the key is to find a debt repayment strategy that works best for you and aligns with your financial goals.