What Is the Debt Snowball Strategy?

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What is the debt snowball strategy

When it comes to eliminating debt, there’s no such thing as a one-size-fits-all approach. With the debt snowball method, it’s all about the quick wins to keep you motivated and using that momentum to stay on track with your debt payoff goals. Unlike the debt avalanche, which takes a more mathematical approach to eliminate debt, the snowball strategy uses the psychology of positive feedback to make sure your repayment goals don’t get derailed.

What is the debt snowball?

The debt snowball strategy is simple to understand but also goes against conventional wisdom. The approach relies on paying off debt with the smallest balances first, even if they have the highest interest rates.  To avoid defaults, you pay the minimum amount required on the rest of your accounts.

Once you’ve paid off your first balance, you can then use those funds to pay off the next smallest account. Then it’s rinsed and repeat until all your debts are paid. One of the reasons it goes against conventional wisdom is because this strategy recommends that you pay off the smallest balance first, even if the largest accounts have the highest interest rates and could cost you more money in the long run. People who support the strategy claim that closing off smaller accounts first helps keep them motivated to continue paying off their debts. As I mentioned before, there is no one size fits all approach when it comes to paying off debt, and it ultimately comes down to which path makes the most sense for your situation.

How Do I Use The Strategy To Pay Off Debt?

Let’s say you have five credit cards, each with interest rates ranging from 16% to 22%. Step one would be to create a list of all of your accounts and arrange them in order from smallest to largest.

$300 – 17% APR

$450 – 16% APR

$600 – 17% APR

$1,500 – 21.5% APR

$5,000 – 22% APR

Next, pay the minimum balance on each account. However, pay as much as you can towards the account with the smallest balance. Review your budget to assess how much money you can allocate towards paying off your smallest balance without straining the rest of your finances.

After you’ve paid off the first balance, roll the money over to paying the next smallest account while you continue making the minimum payments required for the rest of your accounts.

Every time you pay off an account, you get a psychological boost that motivates you to keep going. Keep repeating the debt snowball process until all your debts are paid.

What Are The Benefits?

One of the main benefits of using this strategy is the psychological boost you get when you see your balances disappearing, motivating you to continue paying off your debts on the path to financial freedom.

When you’re juggling multiple accounts, it can be frustrating and stressful to find a way to tackle all your debt at once. With the debt snowball method, you don’t have to tackle them all at once. You attack them one by one and build your confidence along the way.

How About The Downsides?

The main downside of the debt snowball strategy is the total cost. You end up paying a lot more interest over time because your costliest debt may end up getting paid last. Compounding interest is no joke, so if you care about saving money and don’t feel like you need the extra confidence boost, the debt snowball method may not be the best choice for you. 

Is The Debt Snowball Strategy Right For Me?

Some people like saving money. Others enjoy the feeling of crossing items off a list. Ultimately, it comes down to whether or not you need the confidence boost to stick to a debt repayment plan. If you feel like you’re organized enough to stay on track, taking a more mathematical approach to debt repayment could be beneficial because you’d end up paying your most expensive debt first and eliminating all of your debt in a much quicker time than you would have otherwise. If you’re struggling to pay your bills on time, Stately Credit is always here to help.

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