The Debt Repayment Snowball
The debt snowball is a common method for getting out of debt. When you reach the last payment on a credit card or loan, you essentially have extra cash that you hadn’t had available to you before. Instead of letting that extra money get absorbed into your monthly budget unnoticed, make a plan for it by applying it to another financial obligation to pay it all off sooner than planned.
How To Start A Debt Repayment Snowball
Take some time to figure out how much you owe and how much you earn each month. Keep a list of your financial obligations – how much the total balance owed for each account is, as well as the minimum monthly payment.
Put your accounts in order from lowest balance to highest balance owed. You’ll send the minimum payment amount to all of your debts except for the first one on your list. After you’ve paid all of your monthly expenses and debts for the month, you’ll send as much as you can afford to send to the first account on your list. You’ll repeat this each month until the first account on your list is paid off in full.
Growing Your Snowball Payments
When you pay off an account on your list, you suddenly have that much more money available to you each month. If you had been sending the first account $100 each month, you can now add $100 to the next debt on your list until that one is paid off in full. When the second account is paid in full, you apply the amount you had been sending to that account to the NEXT account on your list, and so on and so forth.
Each time you pay off one of your debts, you have more money to apply to the next debt in the list. You will pay off your debts much faster using this method than simply sending minimum payments and sporadically sending a random account more money here or there.
The Big Snowball Debate
Many people argue that you should concentrate on paying accounts with the highest interest rates first, while other experts fully support the idea of paying off accounts with lower balances first to give you more money sooner to use to pay off other debts. The truth is – you end up paying off the debts in about the same amount of time whether you pay high interest accounts first or low balances first – but when you pay your lowest balances first, you pay them off sooner and can see your progress much sooner. Having the progress will help motivate you to continue on your journey to become debt free.
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I think the snowball idea is great but often that little payment that has been eliminated just gets absorbed into the overall budget. Cutting back the amount of payments by $15 a month doesn’t seem to make that much difference. Although getting out of debt should be high priority for long term stability I think that learning to live under your means and have a savings is step one. Unless these two priorities are taken care of it is easy to go back into the debt cycle.
It may take three or so extra months to get ready to start hitting the debt but once you do it will be from a stronger position. In the meantime, closing all the credit card accounts is a decisive step in staying out of debt. There has been much emphasis on paying down credit card balances and with good reason but it is important to recognize that much of the rah rah is coming from the financial institutions themselves who want to be on the top of your list. Getting out of debt is required for financial freedom but sustaining your family now and in the future is #1.