Toss Your Debt Away With the Snowball Method
If you were the schoolyard king or queen of rolling perfect snowballs, you most likely remember them as tools for starting fights or building forts, not handling finances. But financial advisors toss the term around as well when talking about debt management.
Touted as one of the most effective ways to reduce debt, the snowball method requires you to pay off your smallest liabilities with larger payments, while paying off bigger debts with minimal sums of money.
Once cleared, you move onto the next debt which is smallest in size, dispensing as much funds as possible while paying the minimum amount on your more expensive debts. You repeat this process until you tackle your largest source of debt last.
How the Snowball Method Rolls…
Let’s say you’re juggling a full plate of debt, and you’re looking for the fastest and most effective way to pay them off. You know what sits on the table, and you’ve even arranged them in the order you plan to pay them off.
- You’re committed to an $8,000 car loan
- You’ve swiped (or tapped) your way to a credit card debt total of $3,000
- You’ve reeled in $2,000 with a line of credit
- Your business loan stands at a total of $10,000
- Your student loan is still in the books with $5,000
All of that amounts to a total of $28,000 in liabilities. It could be worse but it could be better. You may haphazardly make different payments for each debt, perhaps, tackling the ones which have higher interest rates first (see the Avalanche Method). However, with the snowball method, you’d prioritize your payments in the following order:
- Line of credit – $2,000
- Credit card debt – $3,000
- Student loan – $5,000
- Car loan – $8,000
- Business loan – $10,000
You’d start by paying off the line of credit first since it’s the smallest total. Ideally, you’d make large payments to this line of credit, while making minimum payments to the others.
For example, the minimum payment for a credit card might be $100, and you wouldn’t exceed this amount. The minimum monthly payment for your line of credit could also be $100, but with the snowball method, you would pay far more than that to eliminate it as quickly as possibly. So instead of depositing $100, a payment of $500 may be more suitable.
That amount would eliminate your line of credit debt in just four months, instead of 20. Once complete, your next conquest would be the credit card and so on, until you tackle your business loan.
The Good and Bad of the Snowball Method
Now we come to the matter of the snowball method’s effectiveness, and whether it’s the right move for you. Adopting this technique is a personal choice. But like any debt reduction plan, there are pros and cons you should consider first.
Advantages of the Snowball Method
The main benefit of this debt management plan is psychological. Wiping out a source of debt quickly lifts the stress of your shoulders faster. More importantly, it gives you the momentum needed to pay off your other debts and the reassurance that financial freedom is possible.
Additionally, if you’re not a “numbers person”, then the snowball method is your ideal plan since you don’t have to worry about calculating interest rates, which is often necessary for other debt management tactics. It’s a strategy that works best if you dig simplicity.
Disadvantages of the Snowball Method
The downside of the snowball method, however, is the interest rates of bigger debts. As you know, paying a larger debt at a slower pace leads to compounding interest, meaning you’ll owe more money in the long run. The accumulation of these charges and the generally large payments towards debts aren’t too friendly for those with low incomes, and it might be better to try a different plan if your current employment or job situation limits your cash flow.
How to keep the Snowball Effect Rolling?
If you’ve decided that the snowball method is the way to go, the results will feel exhilarating once reached. It’s vital to know how you can stay consistent, however. Fortunately, there are some easy ways to keep up with your payments.
Keep the Momentum Going
- Determine a set amount you’ll be willing to spend on a particular debt (should be significantly higher than the minimum payment)
- Set a time frame for paying off that particular debt
- Cut back on unnecessary expenses
- Find an additional source of income to avail yourself of more cash
- Monitor your progress and reward yourself (modestly) if you’re on track and doing well
Flatten Your Debt With the Snowball Method
Debt can serve as a never-ending source of stress, whether it arises out of necessary expenses, family emergencies or mismanagement of your funds. Regardless of the reasons, you can use the snowball method as a means of flattening your debt, just as long as you plan ahead and stay committed.
As was mentioned earlier, this technique is great for you psychologically since you’ll see some of your debt diminish and disappear in a matter of months. If you make the effort, when you log onto your online banking account, the bars and graphs displaying your funds will look a heck of lot better over time.