When it comes to debt management, be it credit cards or personal loans, there are many strategies we can use. Of course, the goal is always the same: settle outstanding accounts. But if you owe several lenders, it’s not always easy to decide which debts to pay first, or stay motivated while doing so. The snowball debt method is a solution to this problem, so let’s find out how (and if) it works.
The snowball method of debt
Like a snowball, debt has a tendency to start small and then grow, but this logic can also be applied to pay that debt. The snowball method of debt proposes that you should start paying from the smallest to the largest. As you focus on the smaller debts, you will pay the minimums on the large ones.
How to use the snowball method of debt
So how can I apply the snowball method to my own debts? Easy, just follow these steps:
- List all your debts, from the smallest to the largest.
- Organize your expenses to try to pay the minimum in each one.
- Use any extra money and add it for the smallest debt.
- Keep doing the above until the smallest debt is paid, at which point the extra money will have grown (in proportion to the debt being reduced). This is why it is called “snowball.”
- Use the largest remaining money as an additional payment for the next smaller debt.
- Repeat the process until you pay all debts.
Now that we know how it works, let’s learn why it works.
The psychology of snowball debt
As we have said, the snowball debt method is named for the gradual growth of the extra money you are using to pay the debt. But why start with the smallest debt instead of the ones with the greatest interest? Well, it’s pure psychology. As human beings, we have a psychological need to complete tasks, and if it takes us too long, we get discouraged. The snowball method allows you to see real results quickly as you pay off debts, no matter how small they are, in addition to seeing your excess money grow as a tool to get out of debt. That said, it has something more logic. Why don’t you try to see if it works for you?