Have you ever heard of the debt snowball? Most people have found themselves in a situation where they are overwhelmed by debt at some point in their lives. For some people, it’s a constant struggle and becomes so entrenched in their lifestyles that they feel hopeless about the future. With credit cards, personal loans, mortgages, and/or pre-existing student loans cutting into your quality of life, it’s sometimes hard to think you could ever be free from the debt monster.
These days, it’s ridiculously easy to gain access to loans and credit cards. The initial ecstasy that this sudden inflow of cash provides in meeting your requirements soon wears off as you start getting those notifications for repayment and the interest rates start tightening their grip on your wallet. If you feel like you’re drowning in a never-ending wave of debt, you could fight back and regain control over your life through a simple yet effective technique known as the debt snowball.
The debt snowball
The debt snowball technique is about attacking the actual volume of your debt rather than your interest rates. Essentially, the strategy is to focus on repaying your smallest debt as fast as you can by making additional payments over the minimum payment that you are required to make. You can effectively eliminate the debt within a shorter projected time span. You can then use the income freed up by eliminating this debt to make additional payments against your next debt, and so on.
Using the debt snowball, you focus on repaying your smallest debt as fast as you can through additional payments. (Image via Pixabay)
Modus operandi
Create a list of all your existing debts in small-to-big ascending order. Agree to make a minimum regular payment for each existing debt. Make an additional payment apart from the agreed minimum to your first or smallest debt. This additional payment would be your debt snowball amount. Repeat this every month until your first debt is paid in full.
Now you have money freed up from having to make one less minimum payment. Add that money to your debt snowball capital, which means you have a bigger “snowball”, which can now be used to pay off the next debt on the list. This sequence continues with the “snowball” growing and being applied to subsequent debts down the list until all your debts are cleared.
Implications
Dave Ramsey advocates this strategy as one of the primary steps for achieving financial independence. When you’re trying to pay a massive accumulation of debt, the task seems next to impossible. With the snowball technique, your task is compartmentalized, giving you small but substantial wins that help to maintain your momentum.
By focusing on paying off a specific smaller debt faster, you actually are able to free up more capital to eliminate your bigger debts later.
It’s simple. There are no fancy calculations or intimidating spreadsheets to worry about. There are no slippery compound interest games to play. All you have is one number to focus on at any given time, so you’re clear about what your goal is, and just have to go about eliminating that one debt.
By focusing on paying off a specific smaller debt faster, you actually are able to free up more capital to eliminate your bigger debts later. (Image: via Pixabay)
What about interest?
Of course, there are always two opinions about any technique’s efficiency. There are financial pundits who hold the view that the debt snowball is not the most effective way to manage your debt owing to the fact that it doesn’t take into account the interest rates that are charged. Sure, there may be other techniques that save you interest provided you follow them to a T.
However, the truth of the matter is that the best plan to eliminate debt is the one that encourages the person to do something immediately about it in steps they can accomplish. The confidence gleaned from taking small steps toward your goal of financial independence is a big boost and serves to keep you committed, something you may find lacking if you try to follow more complex plans.
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