Snowball Debt Method Explained

The debt snowball approach involves tackling your smallest debts first, then progressively moving to larger ones, a strategy widely endorsed by personal finance expert Dave Ramsey. This method is praised for its psychological boost as well as its effectiveness in speeding up debt elimination. Here's a guide to employing the debt snowball strategy.

Steps to Follow:

1. Organize your debts from smallest to largest balance, noting down the minimum payment needed for each to prevent late fees.
2. Determine your total available monthly budget for debt repayment.
3. Allocate as much as possible to your smallest debt after covering minimum payments for the others. Continue this until the smallest debt is cleared.
4. Take the amount you were paying on the now-cleared smallest debt and add it to the minimum payment towards the next smallest debt, and so on until each debt is paid off.
5. Persist with this strategy until you are debt-free.
6. Redirect the funds previously used for debt payments into building an emergency savings fund.

Practical Example:

Suppose you have two credit card debts and a car loan: one card with a $3,000 balance ($25 minimum payment), another with a $6,000 balance ($50 minimum payment), and a car loan at $25,000 ($500 minimum payment). With $3,000 available for monthly repayments, instead of distributing this amount evenly, prioritize the smallest debt.

The Calculations:

Ignoring interest for simplicity, you'd allocate $500 for the car and $50 for the larger credit card debt, leaving $2,450 for the smallest credit card debt in the first month.

By repeating this method, the first credit card would be paid off in the second month, leaving $1,900 for the second card, along with its $50 minimum payment. This accelerates the repayment, paying off the second credit card in around three months and focusing all resources on the car loan thereafter.

With consistent $500 payments, the car loan balance would have reduced to $22,500 after five months. Following the debt snowball method, the car loan would be settled in about eight more months, achieving debt freedom significantly faster than evenly splitting payments.

Conclusion:

The debt snowball method offers not just a strategic plan for clearing debt but also delivers quick wins, fueling motivation to continue. By witnessing early successes, such as eliminating the smallest debt swiftly, you're encouraged to maintain momentum, making this approach both effective and psychologically rewarding.

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