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SME Business News

Tackling Your Debt Using The Snowball Method

  • Written by News Company


Thanks to cartoons when you were growing up, you might understand the principles behind the snowball method for debt reduction, even if you've never actually played in the snow.

 

The easiest way to build a really large snowball is to start off by making a small snowball. You keep packing snow together until your snowball is somewhere between a cricket ball and a soccer ball. To make it even bigger, you then begin rolling your snowball through the snow, allowing the momentum and weight to automatically pack new snow on, and make the ball larger.

 

The snowball method of debt reduction money management has been around for some time, and works well for reducing most forms of debt outside of a mortgage. It is a relatively simple strategy, but it does also depend on you being current with all your debt, and already working according to a monthly budget.

 

Step 1: List all your debts

 

Compile a list of all your outstanding debts, from credit cards, through to store cards, car loans, and student debt. The only debt you won't list is your mortgage - if you have one.

 

Now sort the debts from smallest balance to the highest balance. You're not going to consider the interest rates on any of the debts at all, unless some of the balances are identical, or very close. Only then would the debt with the higher interest rate go above the other debt.

 

Step 2: Switch to paying the minimum payment due

 

Recalculate your monthly budget; if you're already paying more than the minimum due on some of your debt, adjust them to the minimum due. If you're strictly paying the minimum due on all of them, see if you can trim any of your other expenses to spare some extra cash for your debt.

 

Step 3: Start paying more than the minimum on one account

 

The extra cash you have - either from only paying the minimum on all debts, or from trimming a little from your other expenses - should be added to the monthly payment of your smallest debt. By way of example, if your smallest debt has a minimum payment of $100, and you have $150 extra cash now available, start paying $250 each month towards the smallest debt.

 

Step 4: Repeat until the debt is paid in full

 

Keep paying more than the minimum due on your smallest debt until it is fully paid up. Once the debt is settled in full, add the money that was being used to pay the smallest debt to the monthly payment of the second smallest debt.

 

Keep repeating the third and fourth step until all your debts are paid in full. What you can afford to add to your smallest debt repayment each month might not be much, but it adds up in the end. And once it is paid up, your second smallest debt sees a larger increase in the minimum monthly payment since what you are adding to it is whatever you were previously paying towards your smallest debt. By the time you have completely cleared 2-3 debts, the extra monthly payments are even higher, resulting in your highest debts being paid off much faster ultimately.

 

The snowball method of debt reduction has been criticised by some who prefer to tackle high-interest debt first.

 

But two independent studies have both confirmed that there is a psychological benefit to clearing small debt first, with consumers who follow this approach much more likely to eliminate their debt completely. And if your goal is to be debt-free, it is a relatively simple method to follow, with results that are evident much more quickly.

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