There are many options for relieving your consumer debt. One of the most important things to realize about debt relief methods is that there is not one method built to suit every consumer’s situation. It requires some forethought and figuring in order to decide which method is best for revamping your finances and avoiding debt in the future.
The ‘debt snowball’ method has been touted by several financial experts, including Dave Ramsey, as an effective way of relieving debt burdens. Again, not every consumer will have the right situation for the debt snowball method but some may find it a great starting place for effectively paying off debts in full.
Overview of the Snowball Method
The reason the term ‘debt snowball’ is applied to this technique is because like a snowball, your debt repayments start out small but as you roll along in debt elminiation your payments will grow bigger and bigger until all debts have been paid off. In theory, snowballs gain momentum and size as they roll down a hill.
Here is the path your debt snowball will travel:
Choose Your Debts
The only way to make the debt snowball technique work is to be in touch with what your debt situation looks like by creating a complete list of all your debts. Include your creditors, debt balance, interest rates, and monthly payment requirements.Setting Priorities
One question that comes into play initially is who to pay first. Some people prefer knocking out the smallest debts first while others will work on the debts with the biggest balances first. Whichever start you choose, consider the interest rates and the time it will take for debt payoff as well as any credit score damage.Building the Snowball
The snowball will begin with your choice of one priority debt. You’ll begin the process by a large amount of cash toward the priority debt, usually the smallest one, while continuing to pay just the minimum amount on the rest of your monthly debts to keep your credit history stable. You must budget to figure out how much ‘extra’ you can afford to put towards your debts while still maintaining minimum payments for the other financial obligations you have.
Traveling the Path
The monthly amount you come up with to pay towards your priority debt becomes an important figure. You will continue to pay this amount on the priority debt. When that debt has been paid off, you will then add that payment to the payment of the next debt. In effect, this will give you a boost a self-esteem as you effectively start eating away at your debt.
For example: if you pay $250 towards Credit Card 1 until it is paid off, you will then pay $250 plus the minimum amount, say $50, you have been paying on Credit Card 2 until that is paid off. For Credit Card 3 you will pay the $50 minimum + $250 + $50 each month until paid off.
By the time Credit Card 4 is up for payment priority, you will have $400 to put towards that bill following the above sample without having to pay any more than you originally budgeted towards debt relief.
Staying Commited
The hardest part of the debt snowball method is getting started for most people but once you get used to paying that same amount each month in a more effective manner, it certainly can get easier – especially in the end where you end up with a lot of money to dedicate to your other debts.
If you have chosen to pay off the highest debt first, you may struggle through the time it takes to eliminate the debt. But once that is accomplished, the smaller debts will get paid off faster since you will be allocating more money towards the later debts.
Staying committed is the key factor in any debt relief plan. You have to have the dedication to stay focused and keep your money moving towards paying off debt. You can also extend your plan into the future as more motivation by agreeing to put into savings the total amount you have been putting towards your debt payments. Since you are used to the concept of spending that money each month anyway, you have likely learned to live without it. You will build up an excellent nest egg by committing that cash to savings at the same time you continue to learn to live below your means.
Snowball Your Way to Debt Freedom
If the situation is suitable for your debts and finances, the debt snowball can be an ideal way to eliminate debts in a fast, effective manner. Because consumers often see the results of their efforts rather quickly, they may be more motivated to keep moving forward on the debt snowball plan.
Evaluate many options for debt relief compared to the process of the debt snowball and make a careful decision about which tactic you should employ to knock down debts and avoid them in the future.
Ed O’Brien is a credit repair enthusiast that takes pride helping people get their financial lives on track. You can find more of his articles located on CreditRepair.org.
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