When you’re drowning in a pile of debt, figuring out how to look isn’t always easy. With varying interest rates and payment terms, some people lose faith in their ability to make it happen no debts. But several strategies can help you stay on track to pay off your balances. Depending on your personality, feeling the “quick wins” from the debt snowball method can provide the alerts you need to keep making your payments, according to Tanya Taylor, a New York City certified public accountant and financial coach with decades of experience in the banking and insurance sectors.
What is the snowball debt method?
The debt snowball method is one of the many debt repayment strategies you might consider trying if you have a lot of debt with accrued interest. Essentially, you prioritize paying off your loans with the lowest remaining balances first, and build the metaphorical “snowball” of slowly paid debts.
How does the debt snowball method work?
First, make a list of all debts – from student loans To the car notes Credit card balances – That you still have to pay it off. Note the remaining balances and interest rates. Next, rank your remaining debt balances in order from lowest to highest.
From there, continue to pay the minimum on all of your remaining debt balances each time payment is due. But according to the debt snowball method, any additional payments you can incur to speed up the overall debt repayment should be directed toward the debt with the lowest remaining balance. Once you pay off the smallest debt, take all the money you were spending on the monthly bill for and apply it to the second smallest debt on your list. Continue this pattern of paying off the debt and then making the payment to the next lowest debt until you are debt-free.
Pros of the snowball debt method
Taylor says the benefit of using the debt snowball method is to satisfy your inner need for “quick wins.” Faster insurance financial victories Clearing debt from your budget can push you forward when you feel less motivated to keep going.
“If you’re paying off debts over and over again and you can’t see any changes, a lot of times people get frustrated and don’t really want to pay anymore, pay the minimum, or follow their plan anymore,” she explained.
Leslie Tyne, a financial attorney with over 25 years of experience, agrees that the main benefit of this method is to encourage the debt holder to see progress in repayment and stay on a financially sound path.
“Emotionally and mentally, you can see accounts payable faster, so some people like it because it provides a faster (psychological) return,” Taine said.
Cons of the Debt Snowball Method
Because the debt snowball method completely prioritizes intrinsic motivation rather than providing the absolute maximum amount of total interest accrued, you may not be saving as much money in total payments as you would if you were dealing with more expensive — but harder — debt first. This is because the debts that you prioritize repayment under the debt snowball method are not necessarily the debts with the highest accumulated interest.
The debt snowball method vs the debt avalanche method
Taylor says snowball techniques and debt collapse are the “two most popular ways to pay off debt” for ordinary consumers. Both are accelerated repayment techniques, but the debt avalanche method can save you hundreds of dollars more in benefits than the debt snowball method.
This is because the debt avalanche method flips the text of the snowball method; Rather than paying the lowest remaining balances first, the avalanche method dictates that any additional payments be prioritized over the debt of the highest value interest rate first. It may work best for a disciplined individual who can substantially maintain repayment motives.
However, both methods will help you pay off your debts more quickly than if you made minimal payments across all your debts each month.
According to Tayne, “There is no one method that works best for everyone.” Indicate that your family’s circumstances, current and future cash flows and types of debt You can consider the method or methods of accelerated debt repayment that you want to try.
“There are many factors that go into deciding the best possible method — what would really be most successful and motivating for the individual debtor trying to pay their debts,” says Taine, adding that “there has to be flexibility within these approaches” due to changing personal circumstances. Most important, she says, is to make consistent payments and reassess each month how much you can actually afford to pay your premiums beyond the minimum.
When should I use the snowball method for debt?
Consider using the debt snowball method when you lose the motivation to keep making minimum payments in a timely manner, let alone get rid of larger amounts of debt each month. Debt doubling helps you visually see the total number of debts diminish, which gives you a powerful psychological boost to keep going as you meet additional benchmarks — even if you don’t necessarily save the most money in the long run.
“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 thinking, ‘What’s my method of payment?'” “
Debt does not necessarily have to stem from different types of loans or lines of credit; For example, you could carry high balances on several different credit cards or have residual debt on multiple student loans. But no matter how many debts you have, Taylor suggests choosing a debt repayment plan when you reach about $5,000 in total.