16 Oct Pay Debt with the Snowball Method
Have you ever heard of paying debt with the snowball method? This debt repayment plan gets rid of debt by ridding the smallest debts first. You’d pay off your smallest debts first, then a bigger one, one even bigger than that, and so on.
The snowball method is a great way to feel a sense of accomplishment when paying off debt. Many formerly indebted swear by it, proclaiming it “worth every sacrifice.” It psychologically motivates you to keep paying off other debts, making it one of the most effective debt payoff strategies because of the “win” you attain after paying off a debt.
This method was first popularised by finance guru Dave Ramsey, famed for his Christian value-based finance advice and radio segment, The Dave Ramsey Show.
Let’s take a look at how the snowball method works and how you can implement it into your financial life.
How to Implement the Snowball Method
The snowball method involves listing all your debts and ordering them ascendingly. First, list all the debts you would like to pay off and order them from smallest to largest. Be sure to maintain minimum payments on your debts so your accounts don’t fall into arrears or default. After you’ve made your list, begin putting any spare money you have toward paying off the smallest debt.
When that’s paid off, put your money towards the next smallest debt. Continue in this fashion until you have paid off all your debts.
This method works best when prioritising the amount of debt you want to pay, not on interest savings. We recommend that you rather use the avalanche method if you prioritise saving on interest repayments.
Example
Joy has medical debt, student loans, store card debt, furniture instalments, an auto loan, and a personal loan. Her balances are as follows:
- Medical debt: R30 000
- Student loans: R100 000
- Store card: R10 000
- Furniture instalment debt: R5 000
- Auto loan: R150 000
- Personal loan: R50 000
She starts by ordering her balances in ascending order: furniture instalment, store card, medical debt, personal loan, student loan, and auto loan. She doesn’t account for APR (annual percentage rate).
She starts by paying off her furniture instalments with her side hustle money, maintaining minimum payments on her other debts. Then, she moves on to her store card debt, continuing until she’s paid off her auto loan.
Pitfalls of the Avalanche Method
The snowball method doesn’t account for interest rates. Since you’re prioritising balances over interest, it may take longer to pay off your balances long term, since interest will keep mounting. You’ll likely pay considerably more in interest and take much longer to pay off the debts.
Instead of the snowball method, consider paying off all your debts at once with a consolidation loan. With this loan, you’ll pay one lower interest fee and one admin fee, saving you money in the long run. What’s more, you’ll have a longer repayment period, allowing you to build an emergency fund or put extra funds toward paying off your debt faster.
If you would like to refinance your debt, contact Debt Refinance. Rediscover financial agency and see how having just one debt refinance will save you money and provide peace of mind. We can’t wait to hear from you!