The snowball method is a popular debt repayment strategy that focuses on paying off your debts in a way that provides a sense of accomplishment and motivation. It was popularized by personal finance expert Dave Ramsey. Here's how the snowball method works:
List Your Debts: Start by making a list of all your debts, including the outstanding balances, interest rates, and minimum monthly payments. Organize them from the smallest balance to the largest balance.
Pay Minimums on All Debts: Continue making the minimum monthly payments on all your debts to avoid late fees and penalties.
Allocate Extra Funds: Identify any extra funds you can put toward debt repayment. This could be from your budget adjustments, additional income, or windfalls like tax refunds or bonuses.
Focus on the Smallest Debt: Take all the extra funds you've identified and apply them to the debt with the smallest balance while continuing to make minimum payments on the others.
Pay Off the Smallest Debt: As you allocate extra money to the smallest debt, you'll pay it off more quickly. Once that debt is completely paid off, you'll have a sense of accomplishment and a "victory."
Roll Over Payments: After paying off the smallest debt, take the entire amount you were putting toward it (minimum payment + extra funds) and apply it to the next smallest debt on your list. This is where the "snowball" effect comes in. You're rolling over the money you were using to pay off the first debt to accelerate the repayment of the next one.
Repeat the Process: Continue this process, moving on to the next smallest debt and applying the snowball effect until all your debts are paid off.
The key idea behind the snowball method is that the early victories of paying off small debts can provide a psychological boost and motivation to keep going. It's a behavioral approach to debt repayment that emphasizes the emotional and motivational aspects of personal finance.
While the snowball method may not always save you the most money on interest (compared to other methods like the avalanche method, which focuses on high-interest debt first), it can be effective for individuals who need the motivation and encouragement to stay committed to their debt repayment plan. Ultimately, the most important thing is to find a debt repayment strategy that works for you and helps you achieve your financial goals.
By Sean Johnson - Managing Director and Financial Advisor
Disclaimer: The financial advice provided here is for informational purposes only. It does not constitute personalized financial, investment, or legal advice. Individual circumstances vary, and it is essential to consult with a qualified financial professional before making any financial decisions or investments.
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