02 Apr Example of How The Debt Snowball Works
Huh? Snowball? Here’s an Example of How the Debt Snowball Works!
When you are in debt and the payments become overwhelming, then it makes sense that you would want to get out of debt quickly. You don’t want that feeling to continue and you don’t want to be in debt forever. You may even consider bankruptcy as an option, but you know that if you make that decision it will haunt you for years to come. There is a way to get out of debt fast, and it is something that you can do:
The Debt Snowball
This is where you list your debts smallest to largest on a piece of paper, regardless of the interest rates. Then you pay minimum payments on all of your debts except the first one. When it comes to the first debt, you throw everything you got at it. If you sell something on Ebay, the proceeds go toward the first debt. If you get a bonus at work, that extra money goes toward the first debt. And so on. Once the first debt is paid off, then you take the money you were putting towards the first one and roll it into paying off the second debt.
Example of How the Debt Snowball Works
John Doe’s list of debts smallest to largest:
Visa – $200 (Minimum payment: $25)
Mastercard – $300 (Minimum payment: $35)
Home Depot – $500 (Minimum payment: $40)
Total Debt – $1,000 (minimum payment total: $100)
John has an extra $100 to pay down on debt every month after making the regular minimum payments. So this means that John will be completely debt free in about 5 months at his current course and speed (Minimum payments of $100 + $100 extra = $200 x 5 = $1,000).
Why the Debt Snowball Works
When you are able to pay off one of your debts quickly, you feel like you are getting somewhere. That you are actually making progress toward becoming debt free. It gives you the motivation and the drive to keep on track and do whatever is necessary to achieve your goal. It is more about human psychology than it is about mathematics when it comes to the debt snowball.
Criticisms of the Debt Snowball
Many financial professionals such as accountants and financial advisers have been known to criticize this method. Why? Because they say that it does not make the most mathematical sense. They note that when you use the Debt Snowball method, you could be paying off smaller interest rates first and be holding on to debts with a higher interest rate longer. Many of them believe that you should pay off the highest interest rate first, this way you pay the least amount of interest and will get out of debt faster.
You decide what works better for you
You have two arguments, one that says paying off the debt with the smallest balance is the way to go and the other says to pay off the highest interest rate first. I am bias, because we used the debt snowball method to get out of debt ourselves. However, we liked being able to feel the progress on a monthly basis and didn’t care what the interest rates were because we were on our way to be debt free. You have to decide for yourself which one you will do, regardless of what you choose, give it all you got and you will be debt free before you know it.
Have you used the Debt Snowball method? What was your experience like?
Image Credit: Saving Cash Naturally