If you have a lot of high-interest consumer debt, it is important to pay it off quickly. The high-interest rates are an opportunity cost for savings and investing in your future. In addition, the faster you pay your high-interest debts off, the more money you will have for other priorities.
It can seem overwhelming to pay off your debts, but at Creditaid, we are here to help make it easier.
What is the Debt Snowball Method?
The debt snowball method is a debt payoff strategy that starts with your smallest debt and works up to the largest. You create a snowball by paying off the debt with the smallest balance first, moving on to the next debt in line, slowing creating a snowball until you wipe out all debt.
It is a self-motivating method that helps you see small wins and shows you that paying off your debts doesn’t have to feel impossible.
How the Debt Snowball Works
Pull all your consumer debt statements together, such as credit cards and other consumer loans, to use the debt snowball.
Order them by smallest to largest balance, ignoring the interest rates for now. For example, you may have a debt with a 5% interest rate in line first because it has the lowest balance, followed by a 20% interest debt and then a 10% interest debt. We are focusing on the balances in this method.
Once you have your debts organized, make sure you have the minimum payment for each debt worked into your budget.
Next, budget any extra money toward the first debt. Keep doing this until you pay the first debt off in full. Next, take that amount of money paid to the first debt (including the minimum payment) and add it to the minimum payment of the second debt. Keep doing this until you have created a debt snowball.
A Debt Snowball Example
Let’s say you have four debts – $1,000, $3,000, $5,000, and $10,000 and the minimum payments are $35, $100, $150, and $250, respectively.
Include the $535 in minimum payments in your budget, and determine how much free money you have. For example, let’s say you have $125 to put toward the debt in addition to the minimum payments.
You will pay the $125 plus $35 minimum payment to the first debt until you pay it in full. Then, you will take the $160 and add it to the $100 minimum payment for the second debt. You would keep doing this until you have paid all debts in full.
Final Thoughts
We know how overwhelming it can feel to be in debt, and the debt snowball method helps simplify the process and get you out of debt. Reach out to us and we can help.
With prioritized payments and careful budgeting debt can be managed. With the help of professionals a debt management program and budget can be worked out that helps you stay out of debt, allowing you to save for your future.
At Creditaid, our professionals have extensive knowledge of debt and we can help set up a plan to deal with it. We offer a broad range of solutions so people can get their finances back on track. Contact us for a free consultation.