Can I Really Reduce Debt By Snowballing?

You may have heard the term snowballing in reference to debt reduction and wondered what it was all about. If you take a snowball to the top of a snow covered hill and roll it down, what happens? It grows bigger and bigger until it reaches a stop at the bottom of the hill. Snowballing is a means of eliminating debt, starting with the smaller ones first, paying the monthly amount plus any extra you can afford, then moving to the next bill taking the money that was the monthly amount of the smaller bill plus the extra amount to add to the next bill’s monthly payment. You do this until all bills are eventually paid in full by the huge amount of extra money you free up each month. It has a cumulative effect that can end with you being debt-free faster. You will see the reduction of debt sooner and the mental impact helps encourage even further debt reduction.

 
List the Debts
In order to pull off an effective snowball campaign, you’ll need to list out all of your debts, minimum payment amounts and total due. Revolving credit debts are the easiest to resolve first. You’ll want to make sure to pay all minimum payments, but add an extra $100 or so to the smallest debt. You’ll quickly have this one paid in full and can move on to the next highest. Make sure that your creditor understands that you want all extra payments to apply directly to the principal. As each debt is erased, you’ll add what you were paying to the minimum of the next debt up the line. Your payment amount increases as you go up the list. The debts might be higher, but so will your available amount for extra payments.

High Interest Debt Kill
The real benefit to snowballing can be seen if you stay focused and disciplined enough to take out the higher interest debt, such as high interest credit cards and car loans. These may be the medium to higher debt amounts, so you won’t realize debt relief as quickly, but in the long run you’ll save a hundreds, if not thousands of dollars on interest payments. Patience and perseverance are the keys to making it successful. Once those debts are paid in full you can start at the bottom of the bunch and work your way up the debt chain again. If the need for new credit arises, try avoiding high interest loans and look for alternative methods of obtaining cash, even if that means borrowing from a non-profit or taking advantage of a government initiative like a Centrelink loan.

To Save or Not to Save
The debates rage on as to whether you should discontinue retirement funding or savings while snowballing down debt. It’s always a wise thing to have a savings and retirement account. If you need to use the payments that would normally go to savings as a way to start the snowball effect, then by all means do that. Reinstate your savings plan as soon as you’ve paid down enough debt to justify it. This is typically no longer than a two year period.

Mortgages
Mortgages are viewed as safe debt to hold. The interest is usually a nominal amount and there isn’t much savings to be had in paying huge amounts of it off. Releasing yourself of other unneeded debt will make any home mortgage seem easier to pay.
Getting out of debt is one of the best things any individual or family can do for themselves. By doing a snowball debt repayment plan, your days of living on edge will be over much sooner than you could have imagined. By paying the smallest bill off first, you get to see the decrease in debt quicker. So go for it, your life and happiness may depend on it.

For additional tips on how to eliminate debt visit our help with debt page.