- September 8, 2024
- Posted by: admin
- Category: Insurance
Are you finding it difficult to stay motivated while trying to pay off your debt?, feeling like you’re not making much progress? The debt snowball method might be the solution you need to pay off your debt and finally become debt-free.
What Is The Debt Snowball Method And How Does It Work?
Do you want to pay off debt and become debt free but you lose motivation quickly as it does not seem like you are getting any closer to the finish line? The debt snowball method may be the key to eliminating your debt. The idea of this method is to start with a small snowball and build it up creating a large snowball by the end having no debt left. You will do this by tackling your smallest debt first, then your next smallest debt and continuing in order, finally paying off your largest debt and reaching the finish line. Before starting your debt snowball, it is a good idea to call the companies you have debt with to determine if they can offer you a lower interest rate. To start the snowball going, any extra that you would normally spread over all the debts, you now put it all on your smallest debt while you also continue paying the minimum payments on the rest of the debts. It is just a tiny reshuffle of funds. If you have anything over and above the average amount you would pay then you add it to the one you are focused on paying off (the first one, in this scenario, the smallest) Once you reach the milestone of finishing paying off the first debt now you will then take the money (don’t put it in your pocket yet-remember debt freedom is the goal) you were using on that debt and add it to your current payment of your next lowest debt and so on. You will save a lot of interest dollars paying your debts off this way. Mortgages are not included in the same way for this, as their interest is not compounded the same way. We are talking about credit cards and loans for these examples.
Debt Snowball Example
Here is an example of the debt snowball plan. For this scenario, let’s say you have $63,000 outstanding owing to the following lenders:
- Personal Loan from a Bank – $5,000, 6% Interest Rate, minimum payment of $110.
- Credit Card Balances – $10,000, 21% Interest Rate, minimum payment of $210.
- Car Loan – $13,000, 9% Interest Rate, minimum payment of $281.
- Student Loans – $35,000, 7% Interest Rate, minimum payment of $290
You will now start with your smallest debt which is the bank loan at $5,000. You will put the maximum payment you can afford towards this while paying the minimum amount on all your other debts. If you can pay an extra $90 making your payment $200 you will pay your bank loan off in 18 months and only would accumulate $231.03 in interest. After this debt is paid off, you take the entire 200 and add it to the next debt, watch it be paid off in super speed.
Debt Snowball Method Alternatives
An alternative to the debt snowball method is using the avalanche method to eliminate debt. The debt avalanche focuses on the debt with the highest interest rates versus starting with smaller debts.
| DEBT SNOWBALL Focuses on your smallest debt first |
DEBT AVALANCHE METHOD Focuses on your high interest debt first |
| Step One – Outline your debts Outline all of your debts from the smallest balance to largest balance. |
Step One – Outline your debts Outline all of your debt from highest interest rate to lowest interest rate. |
| Step Two – Determine your payments In this method you will continue making minimum payments on each of your debts while determining how much extra cash you can add to your payment amount for your smallest loan. |
Step Two – Determine your payments In this method you will continue making minimum payments on each of your debts while determining how much extra cash you can add to your payment amount for your highest interest debt. |
| Step Three – Continue onto your next smallest debt until you no longer have debt. Once you have paid off your smallest debt. Take that money and add it to the minimum payment of your second smallest debt. Continue this until all your debt is paid. |
Step Three – Continue onto your next highest interest debt until you no longer have debt. Once you have paid off your largest interest debt using the debt avalanche method. Take that money and add it to the minimum payment of your second highest interest account. Continue this until all your debt is paid. |
Main Advantage / Disadvantage Of The Snowball Method For Debt
Every plan for getting out of debt has advantages and disadvantages, which may affect the approach you take.
Advantage: One great advantage of paying off debt with this method is that you will constantly be seeing improvements and victories. Your small debt takes less time to pay off than larger debts so you will eliminate debts in full quicker. You will quickly start to see the light at the end of the tunnel as well as giving yourself a psychological boost which can help encourage you to stay on track.
Disadvantage:Since you start off by paying small debts you may not save as much money on interest rates as your highest loan may have the most interest. Even though you are still paying the minimum amount this loan may grow a bit due to interest payments.
What Services Retire Wisely Offers
Retire Wisely offers a financial needs analysis with a roadmap to help all Americans reach financial freedom. Our Retire Wisely can help you get out of debt and find the proper insurance plans to fit your needs, which helps to protect your plan along the way. Contact Retire Wisely today!
FAQ
How do I start my debt snowball?
Whether you have a car loan, a student loan, consumer debt, credit card debt, or any other personal loans, list them all in order from smallest owing to largest. Before starting your debt snowball it is a good idea to call the companies which you have debt with to determine if they can offer you a lower interest rate. Once completed you will start by paying the monthly minimum payment for each loan as well as paying as much as you can on your smallest debt. Once you have made your final payment on your first debt you will move onto your next debt and repeat this process until all of your debts are paid.
How do I know the debt snowball plan for reaching financial freedom is the best debt repayment method?
If you are struggling with debt management and can not seem to eliminate all your debts this method is the best payoff plan for you. The debt snowball works to help you stay on track and be proud of the progress you make even when small because eventually it will be large. Retire Wisely can help you work through your debts as well. They have a program that can include your mortgage and any other debts, goals, dreams. Helps to keep it simple!
Is it better to save money in your own bank account and pay debt in whole or continue to make the minimum debt payments?
The debt we spoke about above is credit card debt and the interest is charged monthly, so your best and most effective way to pay off debt is to do as much as you can at that given moment, you will save a lot more in interest.
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