(Click Here for my Disclosure Policy.)
Paying off consumer debt is very important for your financial health. My husband and I spent the first 5 years of our marriage digging ourselves into a hole of more than $80,000 in consumer debt. In 2015 we started our journey of getting out of debt. With a household income that hovers right around $50,000, it has been a long journey. When we first started our journey we needed a plan to get out of debt. There are two major mathematical equations to get out of debt – the debt snowball vs the debt avalanche. Today, we are going to discuss the debt snowball and how it might be the right choice for your family.
If you are new to budgeting you may want to check out this post first:
Creating a Budget for a Happy and Secure Home
Why should I pay off debt?
You definitely want a big reason for paying off your debt. If you don’t have a big enough reason why you will struggle to follow through with your plan. Other than your personal reason why for paying off debt because debt is risky. Your paycheck is not truly yours and you’ll continue to need to make payments regardless of job loss and illness etc. It is a burden. Until you have paid off your debt you’ll be shackled to the lender.
Paying off your debt will give you freedom. This freedom will allow you to spend your money based on your values. You will be able to invest more into your future and if something is to go wrong like job loss or illness you won’t be burdened with collections if you are unable to pay your bills.
While we are not completely debt free at this point we have felt such a sigh of relief as we pay off each credit card or loan. That is one less lender we have to deal with and one less bill that needs to be paid every month. We have a bit more wiggle room in our budget now to pay off our other debts, save for emergencies, and enjoy a bit of our hard earned money.
What is the debt snowball?
The debt snowball is a debt repayment method where you list your debts in order from smallest to largest regardless of interest rate.
List all of your debts smallest to largest
Credit Card 1: $250 @ 16.7% minimum payment $25
Credit Card 2: $567 @ 12.2% minimum payment $25
Medical Bill: $890 @ 18.3% minimum payment $50
Credit Card 3: $2,563 @ 27% minimum payment $100
Car Loan: $15,745 @ 5.5% minimum payment $350
Pay your minimum payments on all of your debts except the smallest debt. This is the debt you will want to put every extra penny into to pay off quickly. By concentrating on just one debt at a time you will be able to pay it off quicker.
When your first debt is paid off you’ll take your minimum payment and add it to the next debt on the list. Now, in the example above your payment on credit card, 2 will be $50 plus any extra money you are able to put toward it. You will continue to roll your payments into the next debt until your debt snowball is complete.
Why would I use the debt snowball?
In the example above you are probably thinking it is pretty silly to use the debt snowball when some of those interest rates are so high. Yes, with the debt snowball you may end up paying a bit more in interest. However, the debt snowball is about giving you those little wins along the way. This is a marathon, not a sprint. You most likely won’t get out of debt in just a few months. By using the debt snowball you will be paying off debts along the way which is encouraging especially in the beginning.
The debt snowball is a motivation tool when you are paying off a large sum of consumer debt.
Now, you have a basic understanding of the debt snowball. While it does not make the most mathematical sense it is the best way to pay off your debt. It will give you motivation along the way. The journey to debt freedom is long and lonely. I am saying that to scare you from paying off your debt but you will need to make sacrifices along the way to pay off your debt. You didn’t go into debt overnight and it won’t be paid off overnight either! The debt snowball will help keep you motivated and on track.