How to Snowball Your Way Out of Debt?
Popularised by radio and TV finance talk show host Dave Ramsey, the debt snowball method is one of the three main ways in which you can pay off your debts in order of importance – the other two being paying off debts with the highest interest rates first and paying off debts in the order of emotional effect to you.
While the debt snowball has long been antagonised by many financial analysts, with the reason that it’s more logical to pay off those with the highest interest rates first, many borrowers have found success with this method. One reason it is effective is because you can start and focus on a small amount. Another is because you can see results almost instantly, because it’s quite easy to pay off smaller debts, which in turn provide a feeling of self-fulfilment.
If you’re considering the debt snowball to pay off your existing dues, here are the steps to take.
Tackle Your Lowest Debts First
Many self-proclaimed financial experts may talk you out of the snowball method and defend that it will be very costly for you. While it’s true that paying higher interest rate debts first may be the financially savvier option, it sometimes makes sense to pay off the smallest debts first, just to have at least one gotten out of the way.
When doing the debt snowball, it’s advisable to list down all of your debts from the smallest to the highest, regardless of the interest rate. Amass as much money as you can each month, pay the minimum on your other debts, and any excess should go into paying the smallest debt until it is paid off in full.
Proceed to the Bigger Debts
Now this is where it gets pretty challenging. As you go along, you’ll be tackling bigger and bigger debts. But if you remember the first step, any amount that was used to paying off the smallest debts should now be pooled into paying the bigger debts. Because you’ve already paid off the smaller ones, you’ll have more money available for the major debts.
The important thing to remember here is to not stop after a few debts are paid off. The secret to a successful debt payment strategy is to start small and use that momentum as your leverage.
Refrain from Acquiring More Debt
Whatever kind of strategy you choose to apply, it would not work without the right amount of discipline as you’re bound to fail midway. Rather than relaxing after seeing a few debts crossed off your list, you should continue to watch over your spending and live below your means so as not to add fuel to the flame.
Aim to Increase Your Income
If you find yourself struggling and you feel that the amount you’re setting aside for debt repayment isn’t enough, perhaps it’s time to find a second (or third!) job. While this might be difficult, remember that you need to increase your cash flow, at least until you don’t have any debts left. If you’re feeling lazy, remind yourself that it is you who put yourself in the situation, and that it wouldn’t have happened had you had enough cash for emergencies.
Finally, it’s important to focus on your goal and see it through the very end. Nothing will happen if you lost interest or had given up in the middle of all the struggles. By focusing on what you want to accomplish, making a few sacrifices, and setting a time frame for your goals, you’ll be headed in the right direction.