Before I start getting into exactly what the debt snowball method is and why it’s the best way to handle debt, allow me to talk about my own financial history and set the stage for my logic.
Debt repayment can be a real pain in the rear. I know, from personal experience. I have worked diligently over the past 4 years to rid myself and my family from all consumer debt. The pressure of outstanding balances hangs over your head and constantly remains in the back of your mind even if you try not to think about them.
Moreover, people unintentionally fan the flames further by jumping directly into the most commonly used strategy in order to tackle their consumer debts (such as car loans, student loans, credit card balances, medical bills, etc.). This happens to be the most impractical method too and it is – paying the minimum amount due each month.
Now coming to why is this a bad idea! The reason is related to human psychology – when you go after paying the minimum amount due each month, you see the balance reducing but somehow the end line takes forever to reach (especially for large debts). There is hardly any dent in your combined outstanding balances, and you lose your motivation. Before you know, all that steam is gone, and you stop paying this money each month.
What makes matters worse are the smaller debts buzzing over your head like annoying bees. Man, this is not the kind of pressure that turns coal into diamond! It instead takes a toll on your mental health and finances.
Well, fret not! We are here to help you out by bringing forth an incredible strategy for tackling your debts – both small and large. As you must have guessed it by now, it is the debt snowball method.
Just for a little fun, I will tell you the reason behind this strategy’s name; How did you make snowball when you were a kid? For me, it started off with packing some snow together tightly and then rolling it around in my parents large field down a few small hills. This made the snowball bigger and bigger with increasing speed!
Think of the snowball’s getting bigger speed as your debt’s getting smaller speed. The disappearing debt makes you gain more and more momentum in paying off your debts, the same way in which you as a kid gained more momentum as the increasing size of the snowball motivated you.
That is exactly the reason why the debt snowball method is the best one out there to pay off debts. As you get into the habit of it and develop the mental capacity for it, you will be debt-free in no time.
To give you guys further insight, let’s jump in!
What is the Debt Snowball Method?
In a nutshell, the debt snowball method or strategy accelerates the repayment of debt. This technique involves arranging your debts in ascending order i.e., from smallest to largest in terms of their size – while completely ignoring the interest rates.
After this, ignore the smallest debt in the list and pay the monthly minimum amounts due on all other debts. Now, pay the minimum amount plus as much more as you can on the smallest debt with the intention of paying it off completely.
Now, for this, you might need a side hustle or limit your monthly expenses to save up more – but it’ll be worth it! You will be knocking out a debt completely from your life, even if its small. Imagine the relief you will feel!
After this, you will treat the second-smallest debt as the smallest one and repeat the same method.
What about the big-interest debts we are leaving for the end? Won’t that make this strategy expensive?
To give you guys a snippet of the entire picture, opting for an alternate strategy called ‘Debt Avalanche strategy’ is an option too.
What is the Debt Avalanche Strategy?
Just to give you guys a brief overview, it is a strategy to accelerate debt repayment just like debt snowball method. The point where these two strategies diverge is that debt avalanche method focuses on arranging debts in descending order i.e., from highest to lowest in terms of their interest rate.
Therefore, it prioritizes paying off big-interest debts first unlike debt snowball method – and it might as well save you a couple hundred dollars in interest payment. This makes it the best technique to pay off debt, but only according to the numbers!
The question that arises here is – why are we still advocating the more expensive debt snowball method when there is an alternate strategy available?
As mentioned before, it is because the debt snowball method values human motivation. No matter how disciplined and in-control of your emotions you feel, paying off debt really tests your patience.
That is where the debt snowball method comes in to save the day! It fulfills the human mind’s desire for instant progress; as it helps to wind up small debts in a matter of months. This reduces the debt burden and motivates you enough to stick by the plan till the end.
This is not just me blabbering, let me give you some real proof in the words of the great Dave Ramsey – who is a personal finance author and a staunch supporter of debt snowball strategy. He says:
“But what I have learned is that personal finance is 20% head knowledge and 80% behavior. You need some quick wins in order to stay pumped enough to get out of debt completely”
Need some more convincing? Like me, David Ramsey, and many others, the researchers at Harvard also advocate debt snowball method in spite of the debt avalanche method being mathematically superior. According to a report published by HBR in 2016, the debt snowball method is the more effective technique.
So, what’s that wait for? Don’t you want to be able to scream ‘I am debt free’ at the top of your lungs? If yes, you know what to do. The debt snowball method will be your best friend along your journey of becoming 100% debt free.