If you’re already in debt, don’t despair—payoff tactics such as the debt snowball method allows you get out of it. In this post, we’ll go over what a debt snowball is and how to use it to improve your financial status.
1. Debt Snowball Method
When you use the debt snowball method to pay off debt, you treat yourself with small victories along the way.
You pay off your lowest bills first, then roll the money you used to pay off your initial debts towards paying off your larger debts, similar to how a snowball rolls down a slope.
Small successes along the way, such as the satisfaction of watching debts go one by one, keep you motivated.
It’s not the same as the debt avalanche method, which emphasises high-interest debt to save money but takes longer to pay off the first loan.
How does the Debt Snowball Method work?
First, make sure you’ve planned enough to satisfy each debt’s payment each month. Arrange the debts in order of balance, lowest to largest. Ignore the interest rates on each one.
Put the additional money you set aside for debt repayment toward your smallest loan each month, even if you’re paying higher interest on another.
When the smallest debt is paid off, transfer the entire amount you were paying toward it (monthly minimum plus any surplus funds) to the next smallest loan.
Continue to pay off bills and then use the money saved to the next loan in line.
2. Debt Avalanche
When you use the debt avalanche strategy, you get rid of the highest interest rates first. You put more money toward the balance with the highest interest rate while still paying the minimum payments.
After that, once the first is paid off, you concentrate on the next highest interest rate amount. By eliminating the highest interest rates first, you can save more money overall.