Does reading “debt repayment strategies” send a shiver down your spine? That wouldn’t be the only cause for a case of the chills. The temperatures are dropping, the wind is howling, and it takes me at least 10 extra minutes to leave my warm, cozy bed each morning. February is here, and with it comes thoughts of two things: snow and Valentine’s Day. While piled under blankets with a warm cup of tea, I fondly recall two snow-themed debt repayment strategies: the snowball and avalanche method. Debt repayment isn’t as cold as you think, especially when the warm feelings of debt-free living aren’t far from reach. Let me prove it to you!
What is the Snowball Method?
When a situation is “snowballing,” it means it’s growing bigger and bigger. This debt-repayment strategy follows the same idea with the funds you allocate to debt repayment growing larger, NOT your debt.
The snowball method debt repayment strategy tackles debt balances from smallest to largest. First, you diminish your smallest debt balance until it is paid in full. Then, you roll the money you previously allocated toward that payment onto the next smallest debt you owe. As payments roll over from debt to debt, the amount you put toward each payment snowballs!
How Do I Use the Snowball Method?
As mentioned, you begin by listing all your debts from the smallest to the greatest dollar amount owed. Disregard interest rates and minimum payments during this process. Hold up. Why on earth would I ignore that?! That’s a great question, and we will discuss the answer soon.
After creating your list, you’ll focus on eliminating the smallest debt first. Be sure to pay all the required monthly minimum payments on all your debts as to not harm your credit score.
If you can dedicate additional money to debt repayment while paying all the minimums, allocate those funds to the smallest debt. This gets the repayment ball rolling. To get this extra cash, try adjusting your spending, getting a side hustle, or selling things you don’t use. Obtaining this extra cash requires work, but the money you’ll save and the stress you’ll avoid over time makes it all worthwhile.
Once you’ve paid off your smallest balance, consider the funds you previously allocated to that debt as “freed-up money.” That money will roll over to the repayment of the next debt on your list. As you keep eliminating debts, the amount of money in each payment snowballs. You’ll quickly move through those first few debts and gain the motivation to tackle larger balances.
It’s like rolling a snowball around on snow-covered ground. You don’t have to make a new snowball to knock out each debt. Instead, you have an existing snowball (the minimum payment and any additional funds) that you’re rolling into an even greater snowball (all rolled-over funds combined).
Debt Snowball Example
Let’s look at an example. Here are some hypothetical debts:
Medical:
- Balance: $225 Monthly Minimum Payment: $25
Credit Card:
- Balance: $1,050 Monthly Minimum Payment: $100
Auto Loan:
- Balance: $3,000 Monthly Minimum Payment: $200
To use this method, you would tackle the medical debt first since it has the smallest balance of $225. You would pay the monthly minimum of $25 PLUS any other funds you wish to allocate toward repayment. Let’s say you have $50 you want to add to that minimum of $25. That means you would pay $75 monthly until you no longer have a medical debt. That would take approximately three to four months, considering any interest payments.
Medical:
- Balance: $225 Monthly Minimum Payment: $25 + $50 EXTRA = $75 Monthly
After eliminating your medical debt, start tackling to your credit card debt (the next smallest balance on your list). The key is that rolling over that $75 monthly payment from the prior medical debt. Instead of paying the monthly minimum of $100, you’d pay $175 monthly until you eliminated the credit card balance of $1,050. That would take approximately six or seven months based on your interest rate.
Credit Card:
- Balance: $1,050 Monthly Minimum Payment: $100 + $75 FROM PREVIOUS DEBT = $175 Monthly
That leaves us with our auto loan. You’ve eliminated your medical and credit card debt (woohoo!), and your snowball has…well…snowballed! Take the minimum payment of $200 and combine it with the $175 from the credit card debt to get a monthly payment of $375. It would take approximately eight to nine months to pay off the $3,000 auto loan balance,de pending on the interest rate.
Auto Loan:
- Balance: $3,000 Monthly Minimum Payment: $200 + $175 FROM PREVIOUS DEBT = $375 Monthly
And there you have it! You’ve eliminated your debt using the snowball method in approximately 18 months. Remember, you can add additional funds to your payment whenever you want. If you have a higher disposable income one month and can allocate more money to your payment, do it to speed up the repayment process!
The Downside to the Snowball Method
With the snowball method, you don’t prioritize paying off debts with high interest rates. Therefore, you risk paying more in interest and it may take longer to pay off your total debt.
Why Use the Snowball Method if There is a Risk of Paying More?
Motivation. At first, paying off debt is a frequent occurrence since you begin with small balances. Each time you pay off a debt, it’s a small victory on your journey to debt-free living.
It can be extremely challenging to stay motivated with debt repayment strategies if you don’t see progress quickly. Those who swear by the snowball method suggest that small bits of gratification keep individuals driven and goal-focused.
If you don’t struggle with staying motivated (what’s your secret!), you may want to consider the avalanche method instead.
What is the Avalanche Method?
If you started to shake your head back and forth when you read “ignore your interest rates” for the snowball method, the avalanche method might be more up your alley.
This strategy is the opposite of the snowball method. You start by paying off the debt with the HIGHEST interest rate. The same payment rollover principle applies here, but you prioritize interest rates over balances.
The Downside to the Avalanche Method
It’s easier to lose motivation using this method. If you have debts with large balances and high interest rates, paying them back may take a while. However, you may save more money in the long run.
How Do I Know Which Method is Right for Me?
As a rule of thumb, if you are motivated by saving as much money as possible, consider using the avalanche method. However, if you struggle to maintain motivation when paying off debts, the snowball method may increase your chances of success. Be honest with yourself when evaluating your motivation.
You may be thinking, “Well, gee, I want both,” and that’s completely understandable. Remember: you aren’t confined to one debt repayment strategy once you start it! It might work best for you to use both methods at different times. For example, if you want a few quick wins to get your motivation engine going, knock out a few small debts with the snowball method and switch to the avalanche method later. At the end of the day, you’re paying off your debts, and that’s what counts!
Both methods work. The choice is highly dependent on your goals, values, and life circumstances. Also, consider using this FREE CALCULATOR to get an idea of which method would save you the most money when paying off credit card debt: https://www.magnifymoney.com/calculator/snowball-avalanche-calculator/
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