We are all familiar with snowballs: we make those balls and roll it to clean our backyard or clean out the space for our car (for those who are lucky to see snow during the winter). Snowballs are often used in games such as snowball fights - we scoop snow with the hands, and press the snow together to compact it into a ball. But how about fighting debt by using this method? It's called a debt snowball - a good method for paying off your nonmortgage debt. If you’re familiar with the term "Baby Steps", it right on the second stage, when you already have $1000 of your emergency fund saved up.
How does it work?
This method was originally made by financial expert Dave Ramsey. The main concept is that you pay off the debt in order of smallest to largest. Once you pay off that smallest debt amount you owe you move forward to the next smallest debt to pay off. Write down all of your nonmortgage debts from smallest to largest regardless of the interest rate.
Step 1: List your debts from smallest to largest regardless of interest rate.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.
Why does it work?
This method has a psychological effect. Once you see you easily pay off your debts, it’ll motivate you to keep moving towards other, larger debts. In this case, you only concentrate on how to pay off the smallest debt you have which looks much easier to implement.
However, there are some disadvantages. While you are handling the smallest debt first, the bigger debt stays unattended and that balance might have the highest interest rate, which at the end of the day may cost you more money. Probably, the best advice here will be is to avoid procrastination and get yourself an estimated deadline, which will keep you disciplined.
The debt snowball method is just one approach on the way of becoming debt-free. If you’re willing to pay off your debt as soon as possible, check if you’re qualified for debt relief or consider a debt consolidation. Feel free to Contact Us for a free consultation today. Our certified debt relief experts at Financial Rescue can help you to get out of debt faster and reduce the overall amount of debt. Focus on better things like vacation, education or retirement once you are debt-free!