The debt-snowball method is a debt reduction strategy, whereby you pay off the accounts starting with the smallest balances first, while paying the minimum payment on larger debts. Once the smallest debt is paid off, one proceeds to the next slightly larger small debt above that, so on and so forth, gradually proceeding to the larger ones later.
This method requires your discipline, and once you are done paying off one debt, you have to make the decision to add extra payments onto the next one. It won’t work if you don’t!
Advantages of the snowball method:
1. It is motivating to see the debts being crossed out of the list, and achieving small triumphs.
2. Each small success will drive you push harder and strive to pay off more debts on the list.
3. It is simple, and there is no need for complicated interest calculations.
The basic steps in the debt snowball method are as follows:
1. List all debts from the smallest balance to largest. This is the method’s most distinctive feature, in that the order is determined by amount owed, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.
2. Commit to pay the minimum payment on every debt.
3. Determine how much extra can be applied towards the smallest debt.
4. Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
5. Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.
6. Repeat until all debts are paid in full.
The extra amount paid toward the larger debts will keep growing, similar to a snowball rolling downhill gathering more snow (thus the name).
We have a template available for use with this method, just email us and we will send it to you for free!