A debt will remain a debt, regardless of its size. It can actually take away your peace of mind. The snowball method essentially works for those borrowers who are grappling with issues such as outstanding balances. This method essentially offers a strategy to get rid of debt by prioritizing the repayment of smaller debts first and then moving on to bigger ones. The main objective of the debt snowball method is to build momentum in debt repayment, a lot like the snowball gaining speed while rolling downhill. It is a method that focuses on taking care of the smallest debt first, regardless of its interest rate compared to others. It mainly wants to pay off debts systematically one by one, thereby freeing up the funds for dealing with the next smallest debt in line. Before going ahead with this strategy, it is important to build up emergency savings to handle any unforeseen expenses that may crop up along the way. Such kinds of emergency funds should have at least three to six months’ worth of living expenses.
Here’s a step-by-step guide to implementing the snowball method:
Outstanding Debts First: First, as a borrower, you need to confirm whether you have sufficient funds for minimal monthly payments of your outstanding debts. Next. you should compile a list of all outstanding debts, arranged from the smallest to the highest amounts owed. When you are creating this list, it is important not to consider the interest rate of each debt.
Pay The Minimum Debt First: Once you have listed all the debts, as a borrower, you should pay minimum payments to all outstanding debts except the small ones. Moreover, you must also compile a list of all outstanding debts, arranged from the smallest to the highest amounts owed. As you are creating this list, remember not to consider the interest rate of each debt.
Paying Maximum For The Smallest Debts: Borrowers must allocate as much as possible for the smallest debts first. For these smaller debts, they must assess the extent of funds beyond the minimum payments. Apart from reserving some funds for emergencies, any surplus should be used for making extra payments on these smaller debts. Repaying higher than the minimum required for the smallest debt indicates a small step towards a debt-free future. In case the borrowers lack surplus, they can try generating additional amounts by expense management or taking on side hustles.
Continue The Process Until Debt-Free: When you gradually settle debts, you release more funds and strengthen the capacity to address remaining outstanding balances. When you clear one debt, you get the motivation to move to the subsequent ones. One should not be deterred by interest rates when moving from the smallest debt to the next one and beyond. This process demands dedication and a shift in behavioral patterns, but it is a rewarding journey.
