When you are dealing with debt, it is only natural to try different approaches towards defeating it. Unfortunately, not all approaches yield result. In fact, some of them like paying the highest interest rate debts off, are counterproductive as the lack of visible results whilst waiting to clear the debt can lead to more debt or abandoning everything and risking lawsuits.
The debt snowball method, however, is one of the most effective approaches of tackling debt and many have used it to recover from debt.
How does the debt snowball method work?
With the debt snowball method, you focus on paying off your smallest debt first. There is no attention on interest rates. You simply pay off the lowest debt with all spare money you have whilst making the required minimum payments on your other debts.
When you have successfully tackled your smallest debt, you won’t have to make minimum payment on that particular debt. Instead, you can now transfer money that should have gone to that debt and your spare money to the second smallest debt to pay that one off. During this process you will still need to continue making minimum payments on your other debts.
You will maintain this momentum, using the money you have saved by clearing up smaller debts to clear bigger debts as you go along. After a while, you’ll be left with just one debt which is the largest one. All your money will be channelled to this debt until it is cleared.
To effectively use the debt snowball method, you need to know exactly what you owe. For the most part, your lender will have clear numbers for you either on paper or online. With personal loans, you can use a loan calculator to work out what you are supposed to pay back.
Why does the snowball method work?
- You will see results quickly and it will keep you motivated to continue.
- You will have more disposable income in your account when you have cleared the first two smallest debts. The extra income will go to servicing other debts but at least it is yours to control.
- The emotional high that comes with using this method and seeing results can lead to habit changes such as reduction in unnecessary expenditure. You will notice a gradual shift in the way you think about money as you regain control of your finances.
Will the snowball method work for everyone?
This depends on what counts as your smallest debt. It is easier to use the snowball method when the debt line up is (small to highest): £300, £1000, £2000 and £5000 in comparison to when it is £2000, £5000, £8000 and £12,0000. With the latter, all the disadvantages of paying off highest interest rate debts first could apply.