Use The Debt Snowball Method to Obtain Financial Freedom
by vashal on Aug 20, 2009 with 2 Comments
There are a number of different strategies to pay off your debts. I’ll focus on one popular method, the debt snowball.
The debt snowball is a good way to pay off debts, especially if you have many debts to worry about. It may not be the most effecient path to financial freedom depending on your circumstances, but it does offer the psychological benefit of getting rid of some debts quickly.
How does the debt snowball work?
Basically, you will be paying off your loans in order of the amount you currently owe. You’ll start with the smallest debt, and work your way up to the largest debt. If any of the debts are close in value, I’d recommend paying off the highest interest rate debt first.
To begin, list all of your debts from smallest to largest. This will be the order you pay them off in. The plan is to make the minimum payment on all of the debts EXCEPT the smallest one. Pay as much as you can above the minimum on the smallest loan until it is paid off.
After the smallest debt (Debt A) is paid off, you’ll focus on the next smallest debt (Debt B.) Increase the regular monthly payment of Debt B by the amount that you were paying on Debt A. Continue paying extra on this loan if you can. You’ll now be paying well above the minimum on what is currently your smallest loan, but the amount of money you’re paying on your debts per month hasn’t changed.
With each debt you pay off, you’ll increase the monthly payment on the next loan. This is the snowball effect. By the time you get to your last loan your monthly payment, or snowball, should be pretty big. The amount you owe on your debt will drop relatively quickly.
Pros and cons of the debt snowball
The debt snowball is simple as it lets you focus on one loan at a time. It also feels good as you reach a new milestone every time you pay off a debt. This can provide the motivation needed to continue paying off your debts.
On the other hand, it probably won’t be the most efficient way to pay off your debts. The most efficient way would be to pay off your highest interest rate loans first. So while the debt snowball method may be easier for those who have less financial discipline, you’ll likely pay more interest in the long run if you use this method.
So should you use the debt snowball method? Many financial advisors recommend it. I’d agree that it is an easy method to manage debt, and will likely keep you more motivated to continue paying down debts than some other methods. But if you have the financial discipline, you can likely save some money on interest by using a different method.
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Published in: Personal Finance
Rob | Aug 20, 2009 | Reply
interesting…what are some other methods? is there a way to pay high interest loans first but still feel like your getting sumthing done?
vashal | Aug 20, 2009 | Reply
Thanks for commenting! I’m actually getting close to paying all my debts off. I’ve been focusing on the high interest loans first, which also happened to be the biggest debts (ouch). I made up a payment plan spreadsheet that I use. I picked a time frame, calculated how much I’d have to pay each month to be debt free in that amount of time, and typed in what my total debt would be for each month I followed the plan. So now each month I get to see my “total debt” figure go down. I also pay as much ahead as I can, so I can see how far ahead I am on my “expected balance” for the month. I’ve actually managed to pay everything down twice as fast as expected so far, so I’m way ahead of schedule. It’s a great feeling. I’ll try to post more about setting up a payment plan, as it’s been an important part of my personal strategy.