Do you feel overwhelmed by debt? Do you want to regain control of your finances and work towards being debt-free? The Debt Snowball Method can help. This strategy allows you to make progress by paying off debts systematically and reaching your financial goals faster. It builds motivation and momentum along the way.
The concept of the Debt Snowball explained.
To use the Debt Snowball Method, start by listing all your debts from smallest to largest. Focus on paying off the smallest debt first, while making minimum payments on the others. After paying off the first debt, take the money that was going toward it and put it toward the next smallest balance. This approach allows you to pay off debts more quickly.
The power of quick wins can help maintain motivation and adhere to the Debt Snowball Method until all debts are paid off. Psychological momentum is crucial in this method.
Compile a list of all outstanding debts.
You can keep track of all your debts in one place. Use a debt summary worksheet, online calculator, or mobile app to make it easy. Update the information when balances change. Having one master list will help you see everything clearly.
The debts should be ordered from smallest to largest.
To effectively manage your debts, it is recommended to list them in order of lowest balance to highest, regardless of interest rate. Paying off smaller debts first can provide an early sense of accomplishment and help maintain motivation.
Create a budget for repaying debts.
It is important to analyze expenses and identify areas where cuts can be made. Allocating a significant amount of money towards debt repayment is crucial for effective budgeting. Failure to allocate enough funds toward debts can hinder progress.
I’ve found an effective way to analyze expenses and truly understand your financial situation is to get a 3-month history of your credit card and bank statements. If you have the ability to compile these debts onto an Excel spreadsheet, you can then sort them by the company/merchant name. This will help you identify if you are spending money out of convenience or because it’s something you “want” instead of what you “need”.
Maybe you can trim your Domino’s Pizza to once per month, cut the TV cable, and quit the visits to Starbucks until you’ve trimmed your current debt to the point of earning a short-term reward. Set a goal to do whatever it takes to break the cycle of debt that got you where you are today.
Make a commitment to making regular and consistent payments.
To pay off consumer debt, start by paying the minimum on all debts except the smallest. Put extra money towards the smallest debt until it is fully paid off—Automate payments to stay on track. Consistency and discipline are important for success.
The Snowball Effect methodically pays off debts.
After paying off the smallest debt, take that payment amount and put it towards the next smallest debt. Keep making minimum payments on the other debts. Repeat this process for each balance until they reach zero. Each time a debt is paid off, the snowball gets bigger and faster.
It is important to maintain motivation as balances continue to increase.
Don’t get discouraged when larger debts become the focus. Stay focused on the progress you’ve made. With an end goal in sight and a structured plan in place, you can overcome even the most intimidating balances.
I don’t have the money to pay my debts off.
I’ve been amazed by how many people will tell me they don’t have money to pay off their debts. They live paycheck to paycheck. Yet, if their paycheck was garnished (funds removed automatically) due to a lien with the IRS or some other credit issue, they suddenly figure out a way to make it work.
Getting out of debt isn’t fun or glamorous. It’s going to take work and some sacrifice. It’s time to think out of the box. Let’s get creative to figure out how we can make the income side of your personal finance ledger increase and the expense side of the ledger, decrease.
I had one client who was almost 40 years old, move back home with his parents so that he could rent out his home to generate extra cash flow. I’ve had many others who would get part-time work or side hustles to generate an extra $500 per month to rapidly pay down their credit card debt.
It is important to remain adaptable and modify your Debt Snowball plan if your situation changes. The key is to prioritize paying off your debts in the small-to-large order and allocating any additional funds towards your current target debt.
Celebrate Milestones
Recognize significant milestones such as paying off the first debt, reaching the halfway point on your list, or successfully addressing a major burden. Consider rewarding yourself to celebrate your financial achievements. Maybe this is where you go get your favorite Starbucks drink or celebrate with the whole family over a pizza.
I had a client that made a graphic, similar to what you’d see if a school or community was doing a fundraiser, so the entire family could see the progress and celebrate the little milestones as they shoot for their goal of total debt elimination. Getting your family involved is a great motivator and helps you stay accountable.
The Debt Snowball Method is a great strategy especially if you’ve tried to create budgets in the past because it uses motivation and momentum to systematically pay off debt and achieve financial freedom. By implementing this effective plan, you can transform discouragement into hope and regain control of your life by becoming debt-free.
Your Credit Score – The Added Bonus
The added bonus you’ll receive by working the Debt Snowball method is that as you reduce credit card debt, your debt utilization score will improve, which results in credit score improvements. As that happens, you put yourself in a much better position to request lower credit card interest rates and/or consolidation loans, further accelerating the eventual elimination of debt.
To learn more about how debt utilization works or how it helps your credit score, click here.
If you’ve tried the Debt Snowball method or the Debt Avalanche strategy and you weren’t able to stick with it, you may want to look into the Money Max Account (MMA). The MMA is a personalized computer program that takes into consideration your income, expenses, assets, debts, and goals, then gives you step-by-step, day-by-day, instructions on what to pay, when, to minimize interest and maximize principal reduction. It’s not free but it’s yours for life (with free updates) and I’ve seen amazing results from it.
