Debt Snowball

Managing one’s debts can be quite stressful. Every month you make the minimum payments. Sometimes they’re at the beginning of the month, sometimes in the middle and sometimes at the end. Student loan payments may be every 3 months. If you have switched to direct deposit in hopes that you won’t miss payments, it can end up being even more stressful as you don’t remember when the payment comes off and if you have enough money in your account so that it is not overdrawn. Here is a method of debt reduction strategy that many in the situation of having a few debts will find helpful.

Debt Snowball Method

The debt snowball method is a debt reduction strategy which has been espoused by many leading finance experts. With the debt snowball method an individual with multiple debts sets about paying them off one at a time starting with the debt with the smallest balance. Once this debt has been paid off, the individual then moves on to the debt with the second lowest balance. With the debt snowball method the size of the interest rate does not play a factor in what order the debt is paid off.

An example of the snowball debt method would be if someone has a credit card that is $4,500 with an interest rate of 17%, a student loan of $10,000 at 12%, and another loan at $7,500 at 8%. The individual starts by making initial minimum payments on every one of the debts (they have no other choice). So, it would be $76.50 a month for the credit card, $120.00 for the student loan and $60.00 for the last loan. After this they would then pay their rent, groceries and bills (the necessities) and then they will spend what extra they have into the credit card. Let’s say they have a remaining $100.00 that they can spend. That $100.00 gets paid into the credit card, so in reality the monthly payment is $176.50 (the minimum payment for the month and the extra $100.00 after paying for the necessities). Once the debt is paid off from the credit card, the sum of the money going towards it is then forwarded on to the $7,500.00 loan ($176.50 + the $60.00 minimum payment).

Benefits

One of the main benefits of the snow ball method is a psychological one. In paying the debt with the smallest balance first, the individual is able to pay off the debt fairly quickly. This results in a positive feeling for the individual as they feel that their debt reduction is not as overwhelming as they thought, and rather, quite manageable. This “good feeling” coincides with slightly increasing payments so the later is generally not as noticeable. By the last debt, where the balance (and therefore usually the monthly minimum payments) has become quite high, there is little stress in paying it off as it is the last debt owing and there wasn’t that large a jump in range in payment. This method is also used outside of finances. In social work, clients will set goals with steps in achieving these goals. They will start with the easiest, more bite-sized steps first making it easier to reach their goals. They become familiar with following the steps to meet their goals that when they slowly become more challenging it is barely noticed.

Conclusion

Paying off your debt can aid in the happiness of a person. There is an overwhelming feeling when it comes to owing debt. A feeling of weight being on top of you, and the fear of it gradually crushing you. The snow ball method is an excellent way in managing your debt (and your fears). It is both relatively quick and painless.