Debt snowball – Pay off your debts quickly

The debt snowball method was developed to make it easier to pay off your debts.

Although you won’t save much money when we look at the strategy in the long term and compare it to other methods such as debt avalanche, with the snowball method you have more motivation to stay on track.

This way, you’re unlikely to get discouraged because you can see results quickly.

So follow us to find out the details of the strategy and how to start applying it today.

Does the debt snowball really work?

We can answer this question by thinking about the advantages of the method.

In this sense, the main benefit would be the reward of seeing the first debt disappear, something that happens quickly.

This is because you focus on paying off the smallest debts first so that you can tackle larger ones later.

When you’re in debt, it’s hard to have perspective and even the courage to think about the future.

But with debt snowballing, it’s possible to have an easy and simple timeframe to follow.

The result is that big dreams can actually be achieved.

Is snowball or Avalanche better?

According to a 2012 study by Northwestern’s Kellogg School of Management:

“Consumers who tackle small balances first are more likely to eliminate their overall debt”.

In other words, a person who opts for the debt snowball method is more likely to get rid of their debts.

This is true when we compared to individuals who prefer to pay off balances with high interest rates.

The idea is confirmed by another study, this time carried out by the Harvard Business Review in 2016:

“We concluded that it’s not the amount of the repayment or how little is left on a card after a payment that has the biggest impact on people’s perception of progress; instead, it’s the portion of the balance they manage to pay off.”

So, when you focus on paying off a bill with a smaller balance, your perception is that the victory is greater than spending more time paying off a high-interest debt.

With motivation high, you stick to your plan to get out of debt and pay everything off correctly.

But the debt snowball also has its disadvantages.

For example, when compared directly with a debt avalanche (where you pay off the highest interest debts first), the savings are greater using the avalanche method.

When we consider credit card debt, we know that interest is compounded.

In other words, the interest increases as time goes by, and paying it off quickly is a good strategy to avoid the fees increasing.

In other words, if you opt for the debt snowball, you’ll have to pay more interest, since you’re leaving the bigger debts to pay off later, and they’ll accrue more interest.

What’s best for you?

But we’d like you to understand the following:

Both methods are advantageous. What you have to consider is which will be more advantageous in your case.

If you’re not worried about taking longer to pay off your debts and are looking for long-term savings, a debt avalanche is certainly the best.

Otherwise, the debt snowball will be more advantageous if you would like to see faster results and want to get rid of small debts.

What is the best way to start a debt snowball?

In general, it’s important that you follow the steps of the method for it to be effective in your case.

For example, the first step is to list all your debts in ascending order, from the smallest to the largest balance.

In a debt avalanche, when you structure the list, the aim is to list according to interest, from highest to lowest, but in this case we’ll use the value of the debts and start from the lowest value.

Let’s say your debt is $30,000 for student loans, $2,000 for credit cards and $5,000 for a car loan.

Putting them in the correct order and using the debt snowball, we have the following:

• Credit card;
• Car loan;
• Student loan.

And of course, in the case of two debts with similar amounts, the debt with the higher interest rate should be moved up so that it is paid off first.

Secondly, commit to paying off the minimum amount of all your debts.

Following our example, let’s assume that the minimum to be paid for the credit card is $50.

Also, $300 for the car loan and $400 for the student loan.

Other strategies for paying off your debts

To do this, you should go to the third step of the debt snowball, which is:

Determine the monthly amount that can be applied to paying off your debts.

$750 is the minimum amount, and you need to think about how much more you can invest.

To do this, you need to do a good analysis of your finances, so that you can manage your monthly expenses and don’t run out of money for fixed bills.

So, let’s say you have $1,000 free each month to pay off your debts.

$750 will be used to make the minimum payment on all your debts.

And the remaining amount ($250) should be used to pay off your credit card debt.

In other words, you will apply $300 monthly (minimum amount and extra amount) until you get rid of the debt.

Therefore, as soon as the credit card debt is paid off with the debt snowball, the entire amount should be used to pay off the second-smallest debt (car loan).

In this case, in addition to paying the minimum amount of $300, you would use another $300 to pay off the debt quickly.

Finally, after getting rid of the car loan debt, the next step is to deal with the student loan.

In this case, in addition to paying the minimum amount, you would:

Allocate another $600 to get rid of the debt quickly.

In other words, you would start paying $1,000 to pay off the debt, hence the name debt snowball.

What is the debt snowball process?

To learn more about this method, click here to see a model.

This way, you can organize your debts and get rid of them more quickly.

You can also use a calculator to analyze your debts.

Make sure you use digital tools to make it easier.

Daniel 2 de April de 2024