Jan 31, 2023

What Is the Debt Snowball Strategy?

How does the Debt Snowball Operate?Why is it so famous? Is it something that I ought to be doing? More information in this blog!

What Is the Debt Snowball Strategy?

The debt snowball method works by building momentum like a snowball as you slowly pay off your debts. To do this, pay off the smallest debt first, then move on to the next-smallest debt. Then, keep doing the same thing with the rest of your loans.During this time, keep making the minimum payments on all your loans and put any extra money you have each month toward the loan with the smallest balance. Dave Ramsey made this method well-known, and since then, a lot of people have used it to pay off their debts.

A debt snowball strategy can help you feel like you're in charge again while you pay off your credit cards and loans. Other strategies, like the debt avalanche, can reduce interest costs, but the debt snowball method works well when motivation is key.

How the Debt Snowball Method Works

The debt snowball plan is easy to set up and only takes a few steps.

  1. Prepare yourself : Write down everything you owe. Put the ones with the lowest balances at the top of the list and the ones with the highest balances at the bottom. Don't think about interest rates, monthly payment amounts, and other loan features as you make your list. Pay attention only to the balance
  1. Pay the minimums. If you don't pay the minimum on all of your loans and credit cards, you may have to pay fees and penalties, and it could hurt your credit score.
  1. Pay more on the loan with the smallest balance. Every month, put any extra money toward the card or loan at the top of your list. Your goal is to pay off that card with the smallest balance as quickly as possible.
  1. Then, keep going: Once you've paid off your smallest debt, keep paying off more! Then you move on to the next balance with the smallest amount. On top of the minimum payment you were already making, put everything you were paying toward the smallest loan toward the next one. As you pay off each debt, the amount you have to pay toward the next one will keep going up.

Read more: Everything You Need To Know About Budgeting

Debt Snowball vs. Debt Avalanche

The debt snowball is different from the debt avalanche, which is another popular way to pay off debt. The avalanche method, which is also called "debt stacking," puts debts with the highest interest rates at the top of the list (instead of the smallest loan balance). It will save you money on interest and get you out of debt faster, but it may not give you the quick wins you need to keep going.

Because of the rate on the credit card, you would put it ahead of the personal loan in the example above. But it might take you a long time to pay off that $10,000 balance, and you might give up. A debt snowball gives you a sense of success early on, and you might like that positive encouragement.

Debt Snowball vs. Debt Avalanche

The Advantages of a Debt Snowball 

The main benefit of the snowball method is that it gives you a mental boost. When you see your debts going away, it can give you more motivation to keep paying them off. Even if you only pay off a small amount, you feel better about the progress you're making. This plan could also help you get a better handle on your money and stress in general. The snowball method lets you work on one debt balance at a time, so you don't have to worry about how to deal with all of your debt at once.

Disadvantages of the Debt Snowball Method

The biggest problem with the snowball method is that you might pay more in interest over time than you would if you used another method to pay off your debts. Since the debt snowball method focuses on paying off the debts with the smallest balances instead of the ones with the highest interest, your most expensive debt may be the last one to be paid off.

If you are worried about wasting money on interest, make a list of the APRs and interest rates on your credit cards and loans. If you think the snowball method will cost you too much money over time, it might not be the best way to pay off your debts. Instead, think about using the "avalanche method," which has you pay off your debts with the highest interest rates first.

Should I Use the Debt Snowball Method?

The debt snowball is a great way to get rid of debt. It could be a good choice for you if you like seeing your success FAST and you don't have a lot of high-interest debt.

Not everyone can use the snowball method, though. In some situations, it might not make sense to pay off your debts faster. For example, if you are trying to get Public Service Loan Forgiveness for your federal student loans, the Department of Education might let you stop paying after 120 qualifying payments. If you start paying on your student loan first because it's your biggest debt, it will take you a long time to get rid of it. You'll see the balance going down, but soon you won't care as much and won't pay extra because it takes a long time to see the debt declining. And all of your other small, annoying debts will still be there.

Therefore, instead of paying more on loans, it might be best to pay as little as possible under income-driven repayment and put the extra money toward other high-interest debts. No matter which plan you choose, it's important to find one that you think you can stick to until you've paid off all your debts. For example, the avalanche won't save you money if you have to stop half way.

Wrapping Up 

One way to get out of debt is to use the debt snowball method. If you're ready to pay off your debt, the best thing to do is to sit down, figure out the best way for you to do it, and make a plan.

There are other options! 

You can speak to a professional to figure out the best way to deal with your debt. You are not alone. We get it. Debt can be very frustrating but it is fixable. To get started right away, talk to an advisor at Vincere Wealth Management.

Speak with an advisor here.


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