The Snowball Effect – Paying off Debt


snowball effect paying off debt

Paying off debt of any kind may seem scary, but using the snowball effect strategy makes light work of it. Remember making snowballs as a kid? You probably realised that the fastest way to make one was to pack some snow into a small ball, then roll it around. As you rolled it around, it gained size. This is how we are going to pay off debt, quickly.

Heres how the Debt Snowball Effect Works

The snowball effect is a debt reduction strategy, in which you pay off the smallest debts first, you then roll the money you where paying into that debt, into the next smallest debt, and keep doing this. Let me explain a little more. If you start by paying off a massive debt, it may feel like you are getting nowhere, and give up, but, if you start with the smallest debt, just like I did, and pay it off, the feeling is great when you make that last payment. A weight off your shoulders.

Do the following to begin with:

  1. List your debts, largest to smallest
  2. Make the minimum payment on all your debts, apart from the smallest
  3. Pay as much as you can afford to pay on the smallest debt
  4. Repeat until this debt is paid off

If you don’t know how much you can afford to pay, I suggest you check out my post, How to Create a Budget, it will explain how you can get your finances in order.

After your first debt is paid off, instead of spending that money that you where previously using to pay off that debt, add this money to the payments on your next smallest debt, for example:

Debts

  1. Credit Card £1000 – Pay £400 per month (As much as you can afford)
  2. Car Loan £4500 – Pay £120 per month (minimum payment)
  3. Random Loan £6500 – Pay £130 per month (minimum payment)

Pay the minimum on debts 2 and 3, and pay as much as you can afford to pay on the credit card. After it is paid, now roll that credit card money into debt 2, and continue to pay the minimum on debt 3. So you will be paying like this:

  1. Credit Card £1000 – Paid
  2. Car Loan £4500 – Pay £620 per month (minimum payment)
  3. Random Loan £6500 – Pay £130 per month (minimum payment)

After debt 2 is paid, again roll that £620 into debt 3, and keep doing this until all the debts are cleared.

Why Does the Debt Snowball Effect Work?

The debt snowball effect is now about complicated math, or paying off loans with the highest rates of interest first, it is about behaviour modification. If you start by paying off the largest debt first, it is going to take ages to pay off, and you may get disheartened like I said above, that is why we aim to pay off the smallest debts first, this keeps you motivated to get those debts paid off. When you see that the snowball effect plan is working for you, you will actually stick with it, and become debt free!

Here is a book I thought was a great read, if you have time, check it out!
Saving Your Way to a Better Life: How to Budget, Pay off Debt, Save Money and Shop Smart


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