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The debt snowball method is a fantastic technique for paying off debt. If you have fond memories of snowball fights in the backyard, you likely remember that the quickest way to build one was to pack it very tightly and then roll it around the yard. As the snowball gained momentum, it grew into a snow boulder. The snowball method is a great technique for kids, but it’s an even better way to get rid of your non-mortgage debt. It relies on behavior modification, and when you change the way you handle your debt and actually see progress happening, you’ll be more likely to stick to it.
How it Works
The debt snowball method is a technique used for reducing debt in which you pay off the balances of your debts in order from the smallest balance to the largest balance, building momentum as you pay each one. When you pay off the smallest balance, you use the money you were paying on that account into your next smallest balance. By the time you are paying off large balances, you’ll have freed up more cash from paying off the smaller ones that you’ll have created a “debt snowball” effect. Before you know it, you find yourself putting several hundreds of dollars toward your balances each month instead of a couple of bucks here and there. By following this technique, you build moment, which ultimately changes your behavior and the way you handle debt, helping you to get out of debt for good.
A Debt Snowball Method Example
Let’s say you have four debts. In order from smallest to largest, you have a $1,000 medical bill with a $25 minimum payment, a $3,000 credit card bill with a $75 minimum payment, an $8,000 car loan with $150 minimum payment and a $15,000 student loan with $100 minimum payment.
When you use this method, in this example, you will pay the minimum payments on all of the other bills with the exception of the medical bill. For instance, let’s say you earn an extra $1,000 a month by picking up a few side jobs. Since you have the extra funds available, throw it all at that medical bill to completely pay it off in one shot. You will then take that $1,025 that you’d been paying and roll it into the next highest balance — the credit card. You can pay $2,000 per month on the credit card (the freed-up $1,025 plus the $75 minimum payment). In about a month and a half, say “goodbye” to the credit card. It’s paid off. Follow the same method for paying off the car loan. Take the $2,000 per month that you’d put toward the credit card and in four months, you’re free of your $8,000 car loan!
The debt snowball method is successful because it relies on behavior modification instead of math. In the example above, if you’d started with the highest balance, you wouldn’t see it leave for some time. While you’ll see the numbers going down ever so slightly, you’re more likely to lose steam and stop throwing extra money at that balance. However, when you start with the lowest balance first, you’ll see progress and maintain motivation. The first debt you’ve paid off is gone forever, and the second debt will be eliminated in the near future. When you can see the plan actually working, you’re more likely to stick to it. When you stick to it, you will eventually become debt-free.