What Is Debt-Snowball Method?

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You are in debt and you’re not quite sure how to get out of it. There are many ways for people to slowly get out of debt from claiming bankruptcy to consolidation. Some of these methods are effective while others have consequences. But one particular strategy that is really good to consider is the debt-snowball method.

This method is a debt reduction strategy when someone is in the situation if they have more than one account to pay off starts by paying the smallest balances first. All the while they are paying the minimum payment on larger debts. Once the smallest debt is paid off they move to the slightly larger one and gradually progress to the larger ones. It’s a method that is similar to the “debt avalanche method” in which the person does the reverse.

Below we explain the steps of following the debt snowball method. While simple in theory, there are many things to be mindful of in this method.

The first thing you have to do is list off all the debts you owe. From rental fees to big loans. This is the most distinctive feature of this method since the order of the debts are determined by how much you owe rather than the interest charged.

Once that is determined, start by making a commitment to pay the minimum on every debt that you owe. After everything is said and done, find out how much extra cash you have left and use that money to pay off the smallest balance.

The third step is to pay those balances, but give that extra cash towards the debt that you picked in the previous step. During this step be sure to call up the lender and explain that the extra cash is to go against the principal. The reason for that is that some lenders, when not told about the extra cash, will take the extra cash and reduce the next payment amount as opposed to the principal itself.

Once that particular debt is paid in full, use that payment amount you were paying and roll that into the next debt payment. You then repeat this process again and again until all debts are paid in full.

In the end, the idea of this method is that your payments are slowly getting bigger and bigger the more debts you pay off. By starting with the small debts you’ll be able to build up the extra cash freed from those debt payments quickly and roll it over into the second debt quickly. It works much like a snowball, starting small but as it rolls further, the larger it gets.

This method also works wonders psychologically as couples and individuals will see fewer and fewer bills coming in the mail as more debts are being paid off. It’s relaxing for people since bills are certainly a source of anxiety for some people, some avoiding to open them and hide them away.

It’s no way to live, which is why for this reason the debt-snowball method can work wonders if you follow the steps.

 

One thought on “What Is Debt-Snowball Method?

  • September 10, 2018 at 6:45 am
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    My bankers actually mentioned it and it just made me more confuse. This cleared it up, thanks.

    Reply

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