WHAT IS THE DEBT SNOWBALL METHOD?

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If you haven’t reduced your debt, you might want to try the debt snowball method. You will find that it works very well for people who have debt problems.

The snowball is a tried-and-true strategy for debt repayment. Using simple psychological concepts, the snowball approach will keep you going.

This strategy encourages you to pay off your smallest bills first, which will help you build momentum to tackle your larger obligations when you are ready.

You can’t save as much money on interest using the snowball method as with other debt repayment options.

If you want to be inspired, you’ll need to read this strategy.

Learn the basics of the debt snowball strategy and you’ll find yourself in control of your finances much faster.

What is the “debt snowball” strategy?

Dave Ramsey was the first to publicize the debt snowball approach. It’s one of his most effective debt-reduction strategies.

Your goal is to get the impulse to pay off your smaller obligations first, so you can focus your energy and attention on dealing with the larger obligations first.

The debt-snowball approach requires a bit of preparation.

When starting out, you must first take a close look at your debts, especially credit cards and bank loans.

Start with the smallest debts first. This will allow you to get rid of the most money first.

When the first loan is paid in full, the next lowest debt should be paid off.

It is best to eliminate your debt completely, as the amount you need to pay off increases over time, like a snowball rolling down a hill.

How effective is the “debt snowball” strategy?

Yes, it’s a proven strategy that will help a lot of people! Our brains are triggered into a dopamine loop when we make progress toward paying off our debts.

For example, if you pull a lever on a slot machine or browse through your Instagram feed, it might trigger a feedback loop in your brain.

The reason why you should use the snowball method is that it works because once you achieve one goal you feel so good about yourself that you will be motivated to achieve the next goal.

If you want to win a little bit of money when you embark on a significant project, this is a perfect strategy for you.

Paying off debt with the snowball approach

When it comes to debt repayment, creating a plan of action is essential. So let’s break down the debt snowball strategy into five simple phases so that you can see how it works in action.

  1. Make a note of all of your debts, starting with the least and working your way up. This list excludes your mortgage, which is not normally a debt that can be deferred until a later date.
  2. Set up a budget and start tracking your spending now! Your monthly debt payment will be more predictable if you keep tabs on your spending and make every effort to save money you can.
  3. Every month, make the bare minimum payment on all of your debts. In order to avoid incurring additional fees or penalties, it’s critical to make at least the minimum payment on all of your debts.
  4. The lowest obligation on your to-do list should be the first one to be paid off. Invest as much money as you can while still meeting your fundamental necessities in order to pay down this debt.
  5. Pay down the lowest loan first, then the next smallest. Continue this process until you’ve paid off all of your debt and are ready to tackle another savings objective, such as setting up an emergency fund.

An illustration of the debt snowball strategy in action

The easiest way to grasp the debt snowball strategy is to witness it in action.

If your minimum monthly payments are all paid, then you’re good to go. The following four debts, listed in order of decreasing to increasing in size, may be paid off with the €500 you have left over:

  • I borrowed €100 from a relative at a 0% interest rate.
  • A 24 percent annual percentage rate (APR) on a debt of €1,100
  • A loan of €2,000 at a rate of 12 percent APR.
  • The annual percentage rate on a student loan of €10,000 is 3.0 percent.

Using the debt snowball approach, you would divide your €500 into three equal parts:

  • Your family member’s loan will be paid in full if you pay €100.
  • The remaining €400 will be applied to your credit card debt of €1,100.

In the next month, if you have €500 left over, that money would be used to pay off your remaining credit card debt until it is completely paid off. Before tackling your school loan debt, you’d first attack your auto-finance debt.

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Notably, despite having a far higher interest rate, the family loan is paid off first, even if the credit card debt does. That’s because the debt-snowball technique doesn’t take into account the interest that accrues. With this strategy, you don’t worry about interest rates, but rather how much money you can save by paying off your whole total.

As a result, the debt snowball strategy isn’t suitable for everyone. The debt avalanche strategy can save you money in the long run, and we’ll discuss the advantages and disadvantages in greater detail in the following section.

The benefits and drawbacks of debt snowball method

As simple as it is to use the debt snowball method, it’s not the most cost-effective option. Consider the benefits and drawbacks of the debt snowball strategy before making a final decision to use it.

#BENEFITS:

  • It’s easy. Debt snowballing is a simple concept that doesn’t need a lot of effort to implement.
  • It’s a good way to alleviate the fear of being in debt. An daunting work is broken down into manageable chunks with this method’s step-by-step approach.
  • As a result, it is ideal for people who are driven by speedy results. Dopamine feedback is established early on in the snowball technique. Even if things go bad, the dopamine rush can be just what you need. In order to get out of debt, sticking to a strategy is essential.

#DRAWBACKS:

  • When comparing the debt avalanche with the debt snowball methods, interest rates are not taken into consideration. This strategy can cost you a lot of money in the long run, especially if your most costly loan is also your largest.
  • For some people, it’s not the most energizing method of motivation. For some, the first step is to pay off their largest obligations. The snowball approach may not work well for these individuals.
  • There is a chance it will take longer than other options. Over time, interest builds up in a savings account. Longer repayment periods and higher interest costs might also come from ignoring this important factor.

 

Choosing between a debt snowball and an avalanche is a difficult decision.

The debt repayment strategy that is most effective for you is the one that you use consistently. Using the snowball approach may be a better fit if you’re driven by small victories.

However, if you don’t like the concept of accruing a large amount of interest, you may wish to use the debt avalanche approach instead. Decide on the strategy that best suits your objectives—and your personality trait.

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