Debt repayment is one of the toughest things to do. Paying off a debt can take years and this can significantly impact your income and your standard of living during this time. In the end, you may drag your debts around for most of your life.
The snowball debt repayment method was developed to prevent just that. The idea of the snowball debt repayment is that by getting people to see that they are making progress in their debt repayment efforts, people will be encouraged to continue trying to pay off their debts in a short time as possible.
How the Snowball debt Repayment Method works
The snowball debt repayment technique is where you focus as much effort as possible, in paying off the smallest debts first and once that is cleared, you should then move on to the next one and continue upwards until you’re left with only the largest of the debts.
This means that every month, you only pay the minimum on every loan except the smallest. For the smallest debt, you should pay off as much as you possibly can in any given month, and this will ensure that soon enough, it will be off your list. After that, you’ll move to the second smallest debt and combine the efforts you used on the previous debt plus the minimum payments you were already making on this debt. This will mean that soon enough, this debt will also be done with and the trend will continue, thus improving your credit rating.
The power of the Snowball debt repayment method is the effect that it can have on a person’s psychology. When you attempt to start with the largest of your debts, chipping away at a mountain may quickly start to feel like a futile attempt. However, with the snowball repayment method, you will get to see certain items being removed from your debt list in the short term and this can encourage you to continue in your attempt or to even put in more effort to clear your debts.
The downside of the Snowball repayment method
As good as it may seem to see debt items disappearing off your list, this debt repayment method ignores one important thing- interest rates. A large debt with a higher interest rate will accumulate more interest the longer it goes unpaid. This means that by focusing on the smallest debt rather than the debt with the higher interest rate (debt avalanche), you’ll end up paying more money in the long run.
This is why you need to be able to not just calculate repayment amounts, but also the interest rates that come with any debt.
However, there are experts who argue that the difference between focusing on the highest interest rate debtsand focusing on the smaller debts is negligible.While focussing on smaller debts may result in having to pay more money, this money will be spent over a longer period of time. This means that its effect on your finances may not be as significant as the effect of seeing fewer debts on your repayment list.