Good evening everyone. Today I wanted to provide you with my preferred method of becoming debt free: The Debt Snowball Method. The debt-snowball method of debt repayment is a form of debt management that is most often applied to repaying revolving credit — such as credit cards. Under the method, extra cash is dedicated to paying debts with the smallest amount owed.
The basic steps in the debt snowball method are as follows:
1. List all debts in ascending order from smallest balance to largest.
(Note: This is the method's most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.)
2. Commit to pay the minimum payment on every debt.
3. Determine how much extra can be applied towards the smallest debt.
4. Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
(Note: some lenders will apply extra amounts towards the next payment; in order for the method to work the lenders need to be contacted and told that extra payments are to go directly toward principal reduction.)
5. Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.
6. Repeat until all debts are paid in full.
In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name).
The primary benefit of the this plan is the psychological benefit of seeing results sooner. The theory works as much on human psychology as it does on financial principles. By paying the smaller debts first, the individual, couple, or family will see fewer bills as more individual debts are paid off, thus giving ongoing positive feedback on their progress towards eliminating their debt.
Gavin Taylor
