Just as your debt can snowball into larger and larger amounts, it also can be reduced by adopting the debt snowball method of repayment.
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What is the debt snowball strategy?
The debt snowball payment strategy is designed to focus on getting out of debt while keeping you motivated.
The debt snowball method is a debt-reduction strategy where you pay off debt in order of smallest to largest, gaining momentum as you knock out each remaining balance. When the smallest debt is paid in full, you roll the minimum payment you were making on that debt into the next-smallest debt payment.
Read: Can debt be a good thing
How does the Debt Snowball Method work?
Once you’re ready to commit to the debt snowball method, start with these five steps:
- List all of your outstanding loan and credit card debts.
- Arrange the list from the smallest outstanding balance to the largest outstanding balance.
- Tackle the smallest debt first, regardless of how much the interest rate is. When you do this, be sure to make at least the minimum monthly payments on all your debts. You should then put any extra money you come up with for debt repayment toward the smallest debt.
- Keep the snowball rolling. Continue making a higher-than-minimum monthly payment on the smallest debt until it’s zero.
- Then, move to the next smallest debt. Again, keep making minimum payments on your other debts. But now, assign the extra money you were paying on the first debt to the next highest debt, layering that amount on top of the minimum monthly payment.
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An example of the Debt Snowball
The easiest way to learn this method is by working through a real-life example. Let’s say you have four different debts:
- R5,000 medical bill—R500 payment
- R9,000 credit card debt—R800 payment
- R50,000 student loan—R1,500 payment
- R100,000 car loan—R2,000 payment
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In this example, you’d tackle the R5,000 medical bill first, since it’s the smallest amount. You’d make the minimum monthly payment of R500, plus any extra money you can allocate for repaying this debt. Let’s say the additional amount available is R500. Therefore, you’d pay a total of R1000 each month for the medical bill—while paying the minimums due on the other three accounts. If you keep up these monthly payments, you will wipe out the medical debt in five months
After the medical bill is paid off, you’d move to the credit card debt, the student loan debt and, finally, the car loan debt. When you switch to concentrating on the credit card debt, for instance, you’d make the minimum monthly payment of R800 and tack on the R1,000 you had been paying toward the medical debt. Money set aside for paying previous debts continually rolls over to the remaining debts, resulting in more and more money that you can allocate for the debts that carry increasingly higher amounts.
With the snowball method, the minimum monthly payments and the interest rates don’t play a part in choosing which debt to initially zero in on.
Free course: How to pay off your debt
Why does the Debt Snowball Method work
The debt snowball strategy has several potential positive outcomes that benefit individuals looking to get out of debt. However, there are some drawbacks you should also consider.
Advantages of Debt Snowball Method
- When you see debts disappearing, it can increase your motivation to continue paying off debt. And even if you’ve only paid off a small balance, your confidence in the progress you’re making grows.
- Helps build momentum
- Improve money-management skills
Disadvantages of Debt Snowball Method
- May cost you more in long-term interest
- May take longer to pay off all your debts, as your balance keeps accruing
- Not best for consumers with high balances or high interest rates
How to speed up your Debt Snowball
- Create a budget
- Establish an emergency fund
- Sell some stuff
- Start a side hustle
Read: Why You Should Start a Side Hustle
Is the Debt Snowball right for you?
If you think small victories will provide you with the motivation you need to pay off your debt, the debt snowball method could be just the ticket for eliminating your debt. But if you don’t need instant gratification and you’re irked by the notion of forking over hundreds or even thousands of Rands in interest charges over time, then the debt snowball method may not be your best path toward debt reduction.
Debt Snowball Alternatives
If the debt snowball method isn’t a great fit for you, other debt reduction strategies are out there:
- Debt avalanche method: The debt avalanche takes the opposite approach from the debt snowball: Instead of concentrating on the lowest debt amount first, the debt avalanche focuses first on the highest-interest debt.
- Debt consolidation: You may be able to take out a loan to consolidate most or all of your debts into a single monthly payment. This not only could make it easier to pay off your debts, but also may result in an overall lower interest rate.
- Debt settlement: Debt settlement generally involves paying off your debt in one lump sum at a lower amount than what you owe. You can try to settle the debt on your own or rely on a third-party debt settlement company. While this option may sound attractive, it comes with significant risks. Make sure you learn the ins and outs of debt settlement before you take this path.
Read: Debt counselling Vs debt consolidation loan
Need help to get out of debt? DebtSafe offers safe and secure Debt Consolidation. They are registered Debt Counsellors who fix debt within the firm jurisdiction of the National Credit Act (NCA) – with our process closely monitored by the National Credit Regulator (NCR).
The debt snowball method is just one approach to becoming debt-free. If you’re ready to pay off your debt, the best thing you can do is sit down, identify the right debt repayment strategy for you and make a plan. You might consider using a debt consolidation, which can be an effective tool to help you better manage your finances.
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