How to Snowball Your Debt
Minimum monthly payments — Sorry to break the news but these amounts won’t get rid of your debt anytime soon. Let’s take control of your debt. It does take hard work but it’ll all be worth it when you’re no longer in the red.
The snowball effect is a simple approach. Snowball’s start small, you roll it along the ground adding more snow and kapow it’s grown! Same goes with short term debt, you start with a little, but quickly can end with a lot or something that’s not so short term.
Where to begin:
Lay out all of your debts (except for a mortgage, if you have one) from the smallest to the largest balance, regardless of the interest rates. Smaller loans for most include loans from family or friends, credit cards, or overdrafts. Larger loans are typically things like car loans, personal loans or student loans.
Let’s get negotiating: Check what interest rates you are paying on your current debt, call your bank and try get this lowered. More often than not, banks will match interest rates of other banks. If this doesn’t work, look for banks that are offering balance transfers — which is where you transfer your debt from one bank to another and pay no interest for twelve months (or so).
Keep paying the minimum payments on each of the larger loans, while paying most aggressively on the smallest loan. Be aggressive and set a SMART goal to get rid of debt number one.
How to set a SMART goal:
- Set a date of when you want this first debt to be paid off e.g. six months from now.
- Break your debt down into a month by month amount or whatever aligns with your payday.
- For example, I have a credit card with $2,000 owing, I want to pay this off within 6 months, so I will pay $76 per week for the next six months.
- I will do this by setting up an automatic payment of $76 each day I get paid.
Once you’ve paid off your smallest loan, let’s celebrate quickly, before moving on to repaying your next short term debt, once again through the use of a SMART goal. All the same time continuing to only pay the minimum monthly payments on the remaining larger loans.
The money you were using to aggressively pay off the first smallest debt can be put towards the next targeted debt, and then the third, and so on.
Why use this approach?
At the end of the day, it’s a straightforward and foolproof option. By focusing on your smallest loan first, you can get in some quick wins and confidence to pay off the remainder of your debt. Using this technique also means you won’t lack motivation by trying to pay off your biggest debt first!
Being in debt, is not the same as having a problem with debt. Here at Paper and Sweat we want you to have a healthy relationship with debt and overcome the common fear.
If you need help with setting a smart goal, see my post: The Importance of Goal Setting here