I believe that one of the most crucial components of debt pay off is clarity, and the single best way to gain that clarity is by using a Debt Snowball to understand not only how fast you will pay off your debt based on what you’re currently doing, but also to project how small changes can make a big difference.
What Is A Debt Snowball?
A Debt Snowball is a method of debt repayment where extra cash is dedicated to paying debts with the smallest amount owed first. As each smaller debt is repaid in full, the money used to pay that debt is then applied toward making additional payments on the next-smallest debt, and so on until all debts are repaid. The short way of saying this is that if you are now paying $250 per month total toward debt on all of your credit cards, you will continue to pay $250 until ALL of the debt is gone. The payments “snowball” to the next outstanding debt balance as each debt is paid off.
How The Debt Snowball Makes a Difference
Here are the things that you get from a Debt Snowball that make your debt pay off more effective:
Reason #1: Reality
When people just look at each of their debts in isolation, they can mistakenly think it’s going to take longer to pay off the debt than it really is. But if you apply the debt snowball theory, and continue to redirect each payment to the next debt on the list as you pay off the current debt, it actually takes a much shorter amount of time.
And this is not even finding more money in your cash flow to devote to debt, this is just clarifying what you are already doing!
Reason #2: Organization
There is a huge connection between organization and effective debt pay off. If you’re NOT organized around your debt, you’re only going to be making a payment on your credit card and not really be aware of the ramifications. (This might be by design; some people don’t want to know the ramifications!) Once you have organized a debt snowball, you see how you need to approach your debt in a more methodical way.
Reason #3: Certainty
One of the greatest advantages I see with a debt snowball is the elimination of uncertainty. When people haven’t planned their debt snowball “plan of attack,” they tend to question themselves every month as they pay their credit cards (Should be doing more? Should I use my cash reserves?
Should I look for a lower interest rate?). With the debt snowball, you can set your plan on autopilot and forget about it.
Reason #4: Motivation
Once the debt snowball helps you see what’s possible, I’ve seen it time and time again: you become excited and motivated to make changes to do even more—even an extra $25 or $50 per month can make the difference!
Actions This Week
- Get Organized. Organize all of your debt so that you know the current balance, the interest rate and how much you’re paying it down each month.
- Get Clear. How much can you consistently devote to debt every month and still be okay with the rest of your life? Consider setting this amount and being methodical.
- Cut The Waste. No matter how much I track spending, I usually need to re-commit to cutting back every few months. It’s a process. Spend some time identifying where you waste money and redirect some of it toward your debt.