How the Debt Snowball Plan Works
Did you know that the average Canadian has over $25,000 in non-mortgage debt? This debt often grows with day-to-day transactions, and if left unpaid, it can threaten the financial future of the person carrying it.
Increasing the amounts you pay to your creditors is not always the best way to get out of debt, particularly since it’s not always possible. Instead, you need to focus on a good repayment strategy and follow it to the letter for long enough to make a difference.
In this article, we present a proven method for getting your finances back on track—the debt snowball plan.
What is the debt snowball plan?
To understand the concept behind the debt snowball plan, picture yourself making a snowball. You start by creating a little ball of snow, then roll it in fresh snow to make it bigger.
The snowball method works in a similar way. As you eliminate your smaller debts, the amount you have available to pay your remaining creditors gets bigger and bigger. If you follow the steps correctly, the strategy can help you pay off more and more of your overall debt and eventually solve your money problems.
Step 1: Make a list of your debts, from smallest to largest
The first step of the snowball method is to list your debts from smallest to largest amount owed, regardless of the interest rate.
If you have two debts that are the same amount, place the one with the higher interest rate first.
Step 2: Make the minimum payment for every debt except the smallest
The second step of the snowball method is to pay the minimum amount required for each debt on the list except the smallest. This is the one you will be focusing on.
Step 3: Calculate how much money you have left
Once you’ve made all your minimum payments except for the smallest debt, you’ll probably have some money left over that would usually go toward paying off your debts.
Try not to spend it on other things, because this money is essential for the snowball method.
Step 4: Use the rest of the money to pay off the smallest debt
The next step is to pay off as much of your smallest debt as possible with the money you have left.
Step 5: Rinse, repeat
The final step is to repeat the first 4 every month. That way, your smallest debt will be paid off quickly and you’ll be able to remove it from the list.
Once you’ve paid off your first debt, you can divert the money you have left every month towards paying off the second debt on the list. The amount you were using to make the minimum payments on this debt will be included in the money you have available.
As you eliminate your debts, the amount of extra money you have to pay off the one at the top of the list should keep growing, just like the snowball.
The advantages of the debt snowball plan
There are several advantages to using the snowball method to accelerate your debt repayment. Here are a few:
- The snowball method provides swift satisfaction, because it enables you to pay off your smallest debts quickly.
- The sense of accomplishment you feel each time you cross a debt off the list is very motivating and spurs your determination to continue the repayment process.
The more you use the snowball method, the more money you will have available to pay off your remaining debts, which makes the larger ones less daunting and discouraging.
Your turn to implement the method!
The snowball method only has one flaw—it doesn’t take interest rates into account when determining the payment priority order. That means you may end up paying more in interest over the course of the process. That being said, the main purpose of this strategy is motivation, so if it helps you build enough momentum to eliminate all your debts, the interest will be a small price to pay.
To find out more about ways to get out of debt, check out our other articles on the subject! DMO Credit specializes in no credit check loans. Our quick online loans can help you implement these solutions and pay off your debts. Contact us today to find out more!