What is the Debt Snowball Method?

When you’re drowning in a pool of accumulating debt, it’s not always easy to figure out how to get out of it. But there are plenty of strategies that can help you stay on track to pay off your balances.

When you’re drowning in a pool of accumulating debt, it’s not always easy to figure out how to get out of it. With varying interest rates and payment terms, some people lose confidence that they can become debt free. But there are plenty of strategies that can help you stay on track to pay off your balances. Depending on your personality, the “quick wins” feeling of the debt snowball method can give you the boost you need to keep making your payments, according to Tanya Taylor, an accountant and financial coach based in New York with decades of experience. in the banking and insurance sectors.

What is the Debt Snowball Method?

The debt snowball method is one of many debt repayment strategies you might consider trying if you are holding a lot of debt with accrued interest. Essentially, you prioritize paying off your loans with the lowest remaining balances first, slowly building up your metaphorical “snowball” of repaid debt.

[Read: 10 Easy Ways to Pay Off Debt.]

How does the debt snowball method work?

First, make a list of all debts — from student loans to car notes to credit card balances — that you still have to repay. Note the remaining balances and the respective interest rates. Next, arrange your remaining debt balances in order from lowest to highest.

From there, continue to pay the minimum on all your remaining debt balances each time a payment is due. But under the debt snowball method, any additional payments you can afford to make to speed up your overall debt repayment should be funneled to the debt with the lowest remaining balance. Once the smallest debt is paid off, take all the money you were spending on the monthly bill and apply it to the second smallest debt on your list. Continue this pattern of paying off one debt, then introduce payment into the lowest debt until you are debt free.

Benefits of the Debt Snowball Method

The benefit of using the debt snowball method is to feed your inner need for “quick wins,” Taylor says. Secure faster financial victories erasing a debt from your budget can propel you forward when you might otherwise feel less motivated to continue.

“If you keep paying down debt and you don’t see any change, often people get discouraged and don’t really want to pay anymore, or pay the minimum, or follow their plan,” she explains.

Leslie Tayne, a financial lawyer with over 25 years of experience, agrees that the main benefit of this method is to encourage the debt holder to see progress in their repayment and to continue on a financially healthy path.

“Emotionally and mentally, you can see accounts paid faster, so some people like it because it provides a faster (psychological) payoff,” Tayne said.

[SEE: Things to Do When You’re Deep in Debt.]

Disadvantages of the Debt Snowball Method

Since the debt snowball method entirely prioritizes internal motivation instead of saving the absolute maximum of total accrued interest, you just might not save as much money on overall payments as if you tackled the most expensive debts, but the most difficult to repay. first. Indeed, the debts that you pay in priority according to the debt snowball method are not necessarily the debts whose accumulated interest is the highest.

Debt Snowball Method vs Debt Avalanche Method

Snowballing and debt avalanche techniques are “the two most common debt repayment methods” for typical consumers, Taylor says. Both are accelerated repayment techniques, but the debt avalanche method can potentially save you hundreds of dollars more in interest than the debt snowball method.

This is because the debt avalanche method reverses the script of the snowball method; instead of paying the lowest remaining balances first, the avalanche method dictates that you prioritize any additional payments on the highest debt interest rate first. This might work best for a disciplined person who can inherently maintain their repayment motivation.

Nevertheless, both methods will help you pay off your debt faster than if you simply made minimum payments on all your debts each month.

“There’s no one method that works best for everyone,” Tayne says. She notes that your family situation, your current and future cash flow and the types of debt you may all consider which accelerated debt repayment method or methods you want to try.

“There are so many factors that go into determining what the best possible method is – what will really be the most effective and motivating for the individual debtor trying to pay off their debts,” Tayne says, adding that ‘”There needs to be flexibility within these methods” due to changing personal circumstances. What’s more important, she says, is to make regular payments and re-evaluate each month the amount you can really afford to invest in your repayments beyond the minimum.

[Read: Best Budget Apps.]

When should I use the debt snowball method?

Consider using the debt snowball method when you lose the motivation to continue making timely minimum payments, let alone snack on larger debts each month. The Debt Snowball helps you visually see your total debt count go down, giving you a powerful psychological boost to keep going as you hit additional benchmarks – even if you’re not necessarily saving the most money. long-term.

“Most Americans have multiple credit cards or multiple types of debt,” Taylor says. “I think as long as you have three or more debts, you should start asking yourself ‘what is my repayment method?'”

Debts do not have to come from different types of loans or lines of credit; for example, you might have high balances on several different credit cards or have outstanding debt on several student loans. But no matter how much debt you have, Taylor suggests selecting a debt repayment plan when you’ve accumulated about $5,000 in total.

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What is the Debt Snowball Method? originally appeared on usnews.com

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John A. Bogar