Paying off debt takes planning and dedication, but most importantly, it takes discipline. Unfortunately, discipline isn’t always a strength for many people, which makes it easier for them to fall back into the cycle of debt, or to become resigned and pay it off slower. In the end, all this does is make creditors more wealthy and keep you from achieving your personal goals faster. The good news is there’s a tried-and-true method to help not only pay off debt, but motivate you at the same time. It’s called the snowball method.
What is the Snowball Method?
The Snowball Method is a way to pay off debt quickly by rewarding you for your steadfastness. The idea behind it is that instead of paying down the accounts with the largest interest first (that’s called the avalanche method), you pay off the smallest one first. The sense of satisfaction alone helps keep people on-track with their financial goals, however it doesn’t stop there. Then, the amount you were paying monthly on your now paid off account will go towards your next smallest balance. Slowly, you start chipping away at your debt and you can see measurable progress.
What’s an Example of the Snowball Method?
You may still need help visualizing what the snowball method would look like to you, so, let’s look at a step-by-step hypothetical situation.
Susie owes $1,000 on her credit card with a 5% interest rate, $5,000 on her student loans with a 2% interest rate, $10,000 on her car loan with a 10% interest rate, and $200 in medical bills.
With the snowball method, Susie will pay the minimum monthly payments on all of her bills, but she’ll also add $25 to the $50 a month she was paying on her medical bills. In a few months when those are paid off, that $75 that was being used to pay medical bills will go towards her normal credit card bill of $25 a month. This means in a little over 11 months, Susie will have paid off her credit card debt. Then that $100 will go toward her student loans, and then her car after that’s paid off.
Since the first debt was paid and off her mind, but she was still accustomed to paying out that amount of money, Susie was able to pay down all of her debt faster than if she paid a little more on accounts here and there. The more years you take to pay off your accounts, you end up wasting thousands of dollars purely in interest fees.That’s why many people find the snowball method helpful.