If you’ve ever looked into how to repay your debts faster and more efficiently, you probably heard of the debt snowball method. But what is it exactly? And should you adopt this strategy for debt payment?
There are two main approaches when it comes to debt payment. One of them is the snowball method while the other consists of paying off your higher-interest debt first and is also known as debt avalanche.
The snowball method consists of paying off your debts starting from the smallest and moving on the biggest. This strategy is based less on focusing on numbers and more on human psychology. The reason why it became so popular is that it allows you to see clear progress. Because it creates momentum, this strategy will motivate you to keep going.
This debt-reduction strategy was popularized by Dave Ramsey. The radio show host and businessman is a proponent of the idea that debt payment is all about behavior modification rather than a mathematical approach.
The snowball strategy for debt payment step by step
1. List all your debts from the smallest to the biggest. Remember to list every debt you have, from your credit card debt and medical bills to your student loans. If you have a mortgage, that will likely require a different approach so leave that one out.
2. Make a debt payment plan. Set out to pay off the minimum monthly payment on all your debts except the smallest. Make a clear plan on how much to pay each month on the smallest debt to extinguish it as fast as possible.
3. Keep paying as much as you can on your smallest debt. And adjust your plan if needed. If one month you can afford to pay more, try to do so. Always aim to pay higher than the minimum monthly payment. Do so until you finish paying off your smallest debt.
4. Move on to the second smallest debt and repeat. When doing so, you will put the amount previously used for the smallest debt towards your second smallest one, therefore increasing your monthly payment. And just keep doing so until all your debts are paid off.
According to studies like the one conducted by the Kellogg School of Management, the snowball method is more successful than other strategies for debt payment. So it’s worth giving it a try.
The process is quite simple and straightforward but it does require planning and managing your money wisely. If you choose to adopt this strategy, make sure to also have a well defined monthly budget. And remember not to fall into these mistakes many people make when trying to get out of debt.