Debt snowball method

Debt snowball method — have you heard of it? The debt snowball method is a simple debt management strategy that combines psychological motivation with an effective debt reduction strategy.

Debts can feel overwhelming, especially when you have multiple creditors each seeking their minimum payments. But the debt snowball method may help you feel in control of your finances.

In a nutshell, the debt snowball method works as follows:

  • Make all of your required minimum payments on all of your loans every month;
  • List all of your loans from lowest amount owing to highest amount owing;
  • Funnel all extra and available income to the loan on which you owe the least amount of money (Loan A). Continue doing so until Loan A is paid off.
  • Once Loan A (your smallest loan) has been paid off, choose the next smallest loan (Loan B) and funnel all available income into that debt.  But there’s one more key step…
  • Remember the minimum payment that you used to pay into Loan A, but you don’t have to pay it anymore because Loan A has been eliminated? Well, set aside that minimum payment amount, but commit that payment every single month to Loan B instead.
  • Continue until all debts have been eliminated.

The appeal of the debt snowball method is that, by choosing to pay off your smallest debts first, you see results, which motivate you to stay with your debt elimination strategy.

The debt snowball method isn’t necessarily the wisest debt reduction strategy. In fact, I generally recommend paying off loans with the highest interest rate first. However, many people choose the debt snowball method for loans that have similar interest rates.

You may want to supplement your debt reduction strategy with a second job, consulting, financial restrictions or other measures that will help you make significant inroads in your debt load.

The debt snowball method is an often-recommended strategy because of its simplicity and its efficacy. Consider all the options and then choose the debt management strategy that works best for you.

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Anonymous says:

This is actually an excellent method. I have never heard of it before, but it does seem logical. As long as the smaller debts are being taken care of, you will be motivated to pay off the larger ones as well. I guess it keeps the motivation going.