If you are not doing well financially, you may end up with multiple debts. These debts can take away a significant portion of your income and make it very difficult for you to meet other ongoing expenses.

There are several methods to get rid of multiple debts. Some involve the consolidation of higher interest debts into lower interest payments. Others can be tackled through the negotiation of payment terms. In extreme cases, you may even have to get the debts settled through write-offs or bankruptcies. For extreme conditions only!

The debt snowball is an easy and effective method for taking control of your finances and going debt-free. In this blog post, we review how the strategy works and whether you should use it or not.

What is Debt Snowball

The debt snowball strategy is simple enough to understand. Just like smaller snowballs melt away quicker than larger snowballs, your goal is to get rid of smaller debts first before you focus on larger debts.

This is because smaller debts are easier to clear. When your smallest debt is paid in full, you shift the money that you were paying on that debt into the next lowest balance. Once you have paid the first balance, you move on to the next smallest debt in line. So on and so forth until you get rid of them all.

The rate of interest is not taken into consideration here. Even if you are paying a slightly higher interest rate on a bigger debt, you need to clear the balances from lowest to highest balance.

Why Does Debt Snowball Work?

There are two main reasons why the debt snowball strategy works. The first reason is financial. When you clear a smaller debt, you knock off the money going into that expense altogether. This strategy will help you pour more money into settling the second smallest debt in line and help you succeed.

The second reason is purely psychological. Every time you completely pay off a debt, it will give you a sense of accomplishment and raise your determination to get rid of the next debt in line. If you focus on paying off the bigger debt or try to clear all debts with equal payments, you won’t have that same sense of accomplishment, which can drag you down and stress you out.

How Do You Use the Debt Snowball Method?

There are four main steps to implementing the debt snowball method.

Step 1: List down all your debts from the smallest to the largest with minimum payments required for each.

 Step 2: Pay the minimum amount on all your debts.

 Step 3: Once you’ve cleared the minimum amount, you should clear as much of your smallest debt as possible.

 Step 4: Once the smallest debt is paid off, focus on the next smallest debt. Repeat until you are left with just one debt and clear it off.

Here’s how the method works in real life. Suppose you are making enough money to save $500 each month and have the following debts and minimum payments to make.

1. A hospital bill of $1,800 with zero interest. Minimum payment of $50.

2. Credit card #1 with a balance of $4,000 and a minimum payment of $110.

3. Credit cars #2 with a balance of $7,000 and a minimum payment of $190.

4. Auto loan of $12,000 and a minimum payment of $135.

5. A student loan of $20,000 with a minimum payment of $140.

You will first pay the extra $500 you save each month from clearing the hospital bill. This strategy will help you eliminate the smallest debt within four months.

From the fifth month, you will be able to repay your first credit card by paying an additional $550 into that account. This strategy will help you pay off the credit card within eight months. From then on, you can pay $660 into settling the second credit card.

Is the Debt Snowball Strategy for You?

The debt snowball strategy is not the most efficient. If your smallest debts are interest-free and the larger ones cost a much higher interest rate, you could end up paying more in the long-run. Most people often focus on settling their higher interest-paying debts first to reduce the total amount of money that they pay on debts over time.

There are two scenarios where the debt snowball strategy is the most productive debt elimination plan.

First, the strategy is more beneficial when your lowest debts ARE the most costly debts in terms of interest.

For most people, their lowest debts are credit card balances followed by auto insurance. Student loan debt and mortgages charge a comparatively lower interest rate. If this is the case for you, then we recommend going with the snowball strategy and focus on clearing your smaller debts first before you focus on loans that carry a lower interest rate.

Second, the strategy is more useful for people who lack consistency. If you give up easily or abandon plans often, it is better to go with debt snowball to pay off your debts. When you focus on smaller debts first, they will get repaid quicker, which will give you the necessary psychological incentive to carry through with paying off larger debts as well.

Market research involving 6,000 debt repayment clients showed that achieving sub-goals, like paying off a smaller debt, is an excellent motivator for the successful completion of the debt plan. If the debt snowball strategy gives you the kind of motivation you need to settle your debts in full, then it may be the most effective strategy for you.

Summary

Getting into multiple debts can be a stressful experience, but there are repayment strategies that you can use to get better control of your finances. The snowball strategy has shown a higher success rate as it divides your debt into milestones, and you get positive reinforcement on successfully paying off each debt.