One of the most stressful things we can experience is not knowing how to start paying off our debt. We have a solution that is going to help you discover the ways you can drastically reduce the debt in your life. It is an easy method that is helping people save millions all throughout the world. How can you use the snowball method to eliminate your debt? Start by prioritizing your debts by smallest to largest.
What is the debt snowball method? The debt snowball method involves starting to pay off your smallest sum of debt, while making the minimum payments on your other loans, and working your way up to the larger debts. Once you eliminate the smallest debt, you attack the next smallest debt. This can be a great psychological advantage as your able to pay off the smaller debts faster then possibly other ones with higher interest. You are able to pay off more total amount of debt accounts opened faster. This method helps to eliminate the number of balances, loans, and other debts that you might have, rather than the amount of total debt you have. You attack the smallest amount at any given time with as much as you can and eliminate more debts faster.
Paying off your debt can be a scary process, and many of us fear that we will be trapped by these throughout our life. If you have three or more outstanding debts, on top of five or more regular payments, this is enough to make you feel like you are in a bottomless hole that has no end. Most of us will have more than three debts, as well, so having all of these huge numbers stacking up can put intense pressure on us.
There is a reason this works other than just the fact that it is paying off part of your debt. It is giving you the encouragement and motivation to know that you are able to do this. It is a reminder that you have what it takes to spend your money wisely and allow it to change your life. When you can see the numbers dropping in the amount you have as well as the actual number of loans that you owe, it gives you a sense of relief that this is something achievable and possible.
How This Works
Let’s pretend that after all of your living expenses have been paid, including your rent, utilities, and so on, you have around $1,500 a month to do whatever with and pay off your debt. You will want to ensure that you are making your monthly minimum payment on all debts. Then, you will prioritize the smallest loans first.
| Total Amount | Minimum Payment | |
| Student Loan 1 | $7,000 | $85 |
| Student Loan 2 | $18,000 | $250 |
| Student Loan 3 | $12,000 | $150 |
| Car Loan | $26,000 | $200 |
| Credit Card | $5,000 | $50 |
| Credit Card 2 | $1,000 | $30 |
| Credit Card 3 | $3,000 | $35 |
You would then look at this and see that with all of your minimum payments being met, you have about $700 leftover to do whatever you want with. Maybe this is money that you would normally invest, or perhaps you just use it for the extra fun stuff in life, like dining out, vacations, expensive purchases, and so on. For the snowball method, what you do is take your smallest debt and make this your priority.
For the first month, you would then make your minimum payments on all, leaving you $700 left over. In addition to paying the $30 on credit card number 2, you would also add about $500. Then, in two months, this is completely paid off. You had to make some sacrifices and it wasn’t easy to see all that money go towards just one part of your life, but it is going to be worth it in the end. You repeat this process of adding an additional $500 towards this total. After about three years, you might have been able to cut down on your 4 biggest debts! Then, your chart would look something like this:
| Total Amount | Minimum Payment | |
| Student Loan 2 | $9,000 | $250 |
| Student Loan 3 | $6,600 | $150 |
| Car Loan | $18,800 | $200 |
This is what your chart would look like if you made your monthly payments, not considering any interest, of course. This would increase your original leftover spending money from $700 to $900. This would mean that you can put even more money towards paying off your debt! Your numbers will be higher because, again, we didn’t calculate interest but you can still get a sense of just how dramatically your numbers change when you start to include the snowball method.
Not only will this help your motivation when it comes to eliminating your debt, but you will also dramatically increase your credit. When your credit is increased, it will make it easier for you to gain access to other financial avenues. You might even consider getting a consolidation loan at some point in order to take care of the mismatched and high-interest rates that other loans could potentially carry.
This is a method of chunking that will seriously make it easier for you to find a way to stick to a healthy pattern of debt elimination. By reducing your lowest debts, you might not be eliminating an overall portion as quickly as you were hoping. However, you are cutting down the overall amount of loans that you have out at a time drastically, and this will give you a sense of relief needed to keep up healthy habits. Methods like the avalanche method didn’t always work for some because it would take years for them to see just one loan disappear from the long list of debt they had. With this method, in as little as a few months you might see in that your debt starts to vanish.
An Encouraging Way to Pay off Debt
Much of the debt that you have is a mental aspect. You don’t have so much debt because of any bad luck. This debt comes as a part of having a poor mentality around spending and saving money. Your debt is something that has been making you feel as though you are in a tough spot and that you might be struggling financially. It is a heavy weight to have to deal with, and crushing debt can really damage a person’s mentality. In order to ensure that you are really taking care of yourself and figuring all this debt stuff out, you will want to ensure that you are taking special time to reevaluate the way that you think about money.
The best way to start this process is with a little bit in your savings. Because this is such a mental thing, it can be scary to take that first plunge. You might have a $600 credit card, and two separate months you have an additional $300 that you can use on these. You might panic a bit, afraid of going through with that $300 that could be spent on a lot more. What if someone steals your phone? What if your dog gets sick? What if you have to travel to visit a sick relative?
There are a million “what-ifs” in the world, and it’s not going to do us any good to sit around and think about all of the terrible things that could happen that we might end up needing money for. Stop thinking about all of these scary “what-ifs” and instead focus on the positive side effects of paying off your debt. If you keep an emergency fund, somewhere around $1,000, then this will give you the confidence boost needed to know that your money is going to be best spent on paying off this debt, right at that moment. If you keep that $300, what happens is that you don’t need it and you end up spending it on useless things that you don’t need anyway! Put your money in the smartest place possible, where you are going to pay off your debt.
The hardest part about this all isn’t always getting the money. You have the money, but you are just spending it in all the wrong places. Maybe you’re thinking to yourself that you only ever spend your money on food, not having much leftover. This is a common problem in our society. We spend our money on fast food, semi-fast food, and quick meals from the grocery store. You can manage your weekly food on $50 per individual while still being able to eat a lot of food throughout the week. If you really want to scrape and save, then $20 a week on food is entirely possible as well. It might include a lot of spaghetti and tuna sandwiches, but it is possible, so don’t think that it’s not! If you are spending any money on going out and drinking at a bar right now, you should stop! Why pay $6 per beer when you can get a six-pack for that at the store? If you go to the movie theater, just wait until the movie comes out for you to rent! You might still pay the $3.99 for the digital download, but that’s a lot less than the $15 ticket, plus the overpriced popcorn and snacks.
Remember that this is all a mental thing. You have to have the discipline to get this done. The best way to stay encouraged throughout the process is to see progress, and that’s exactly what the snowball method provides for you. You can look at your progress and be encouraged that one day, you won’t have any debt left to resolve.
The Benefits and Negatives of This Method
The biggest reason that this is a beneficial process is because of the confidence levels that it provides to those who participate. You must ensure that you are taking these small steps to get you to a place where you feel the financial freedom start to grow within you. By using the snowball method, you are also growing your confidence throughout the entire process. You are giving yourself the chance to build the amount of money that you have to put towards other debt. With each small payoff you have, you widen the extra money that you can include in resolving the next amount. Each time you do this, your money grows and grows, so it will make you feel as though you are getting richer without even having to increase your overall income!
The biggest con of this method is that you might end up paying more in interest down the line. If you have one loan that is $3,000 with an interest rate of 1%, and then a $6,000 loan with an interest rate of 15%, then this is going to have a much higher interest sum at the end of the time that you take to pay it off. By prioritizing this large sum last, what ends up happening is that you pay more in interest, in some cases, a greater amount than your smallest loan!
The easiest way to avoid this and ensure that you aren’t paying too much in interest is to really sit down and breakdown your loans. Start with the smallest of them all, the $200 medical bill, the $300 credit card, the $1,000 loan, and so on. When you get to sums larger than $3,000, then it’s time to really look at what is going to benefit you the most.
Chunk these amounts into different categories. Take things that are $3,000-$7,000 and decide to pay off the ones that are the highest interest first. Chunk them into $10,000 – $15,000, $25,000 – $50,000, and so on. By doing this, you are still creating that smaller momentum that will enable you to be confident in your ability to pay things off. At the same time, you are also ensuring that you won’t end up having to pay an exuberant amount in interest rates.
This is what the avalanche method includes, only, it will focus solely on interest rates. It would have you pay off the $1,000 with the 15% interest rate over the $20,000 with the 10% interest rate, even though the second one is going to have a much higher interest sum in the end. Find a way to combine both of the best aspects of these methods and get the debt resolution needed to find the financial freedom that you deserve.
The Best Tips to Optimize This Process
The best tip that you should try to remember throughout this entire process is that you should absolutely stop yourself from taking on any more debt in this process. The only thing that you should ever consider is taking out a consolidation loan. Sometimes this will help if you have a ton of small loans with high-interest rates. It might serve you better to get one big loan with a moderate interest rate to pay them all off. Don’t be fooled by consolidation creditors, however! Some companies will promise benefits but have hidden fees that cost you more than you would have if you had just stuck to paying the absolute minimum payments.
If you don’t have that many small loans and everything feels rather large and overwhelming, start to set your own small goals. If you have 5 loans between $5,000 – $15,000 and each would take you a year to pay off or more, then just chunk it into smaller sections and let these be your goals. Break larger loans down into three or more parts and celebrate each time you reach a milestone within that specific goal. Consider checking out the avalanche method if you have all larger loans as well.
One of the most helpful things you can do in this process is to get a second source of income. You might already be doing this, and that’s totally fine! If you’re not, consider finding a new way that you can add to your income. You can take up a second job and have this be solely dedicated to paying off your debt. Even if you work 20 hours at a minimum wage job, this could give you $10,000 or more every year. Imagine how much faster your debt would be reduced if you did this! Look for methods of passive income as well. Refrain from investing, however. Investing in too much with high expectations can alter your mentality, and it’s crucial you stay focused on paying off as much debt as possible in one instance at a time.
Start this process immediately. Don’t wait until next month when you “might” get a bonus. Don’t put it off until next year after the holidays. Don’t wait until your investment comes through. The longer you wait, the more interest you create, and the more you validate that procrastination mentality that you might have had up until this point. Don’t get too hung up on the math in the process as well. You might lose out on some money by paying higher interest here and there, but it’s always best that you’re just doing as much as you can, as often as possible.
Never stop looking for new resources! You might find that you can reconsolidate a loan, find lower interest rates, or reduce an amount altogether, especially if you owe a debt collector. Talk about your debt to someone who can relate and don’t be afraid to ask for help through emotional support if needed. You got this!
Related Questions
Some might become apprehensive because this method can sound so simple on paper. You might have a few questions you need to be answered, so that you can really understand what it means to start to implement this method into your life. This was a quick introduction to a topic that can feel rather complex, so never feel bad if you need a further understanding of something to really know if this method is right for you.
Who will benefit the most from this method?
This is a method that many different individuals can find benefit from after using it for even just a year. It will work best for individuals who have multiple small debts. Anyone who is overwhelmed by the number of loans they have out more so than they are the total amount should consider using this method to help them out of their troubles first.
Wouldn’t it be better to put my extra money into my savings?
Saving is important and shouldn’t be entirely forgotten. Saving can be treated like a debt in itself, where you prioritize what you can towards it. Make your savings account like a payment that you make monthly and keep it on the average amount that your minimum payments are. If you are in the process of paying off debt, you should focus on not doing anything that would require savings, but emergency funds are always useful. Remember that as you clear up your debt, you will have access to more credit deals as your score might be improving, so getting smaller emergency funds can still be an option down the line.
What debt should I pay off first?
Your smallest debt should always be the one that you prioritize first. However, debt owed to the IRS or debt collectors should be your first priority. These can potentially take your wages and they will hurt your credit score as well. You can prioritize smaller loans with the highest interest rates as well, if that is something that you would prefer.