You must have heard about the snowball effect – when you start something small and overtime it builds into a significantly larger size. The concept is borrowed from the way we built snowballs as kids; Rolled them on the ground giving it enough momentum which resulted in a big sized ball.
Some people argue that the Snowball method of debt management is the least logical and most expensive way to pay off your debt – it’s true that you could end up paying more in interest, but it has the best success rate as less people lose motivation and stop trying. If you’ve ever tried to lose weight, you’ll know that at first you seem to be losing loads of weight, then it tapers off. This sense of achievement that you get at the start tends to really kick start you and make you want to keep going – this works in the same way.
You start by listing all the different debts you have in size order – no, not by interest rate. Put the lowest amount as debt A, the second lowest as debt B, and so on until you have all of your debt listed.
There’s an exception to this. If any of your debts are payday loans then your best bet is to list that one first, and put the rest of them in order afterwards, regardless of if it’s the smallest. This is because the interest rates that you pay on a payday loan are so high that you’ll want to rid of this one as soon as possible.
Let’s say this is a list of your debt:
- Debt A: £250
- Debt B: £390
- Debt C: £870
- Debt D: £5480
On all of these debts there’s a minimum amount you have to pay off each month – you need to start by making sure these are set up as direct debits and these amounts are budgeted – as in, you have worked out how much goes out every month against what comes in and these minimum payments are in that list. Once these are set up, you need to start by pretending all of your debt doesn’t exist except the first one, the lowest.
This means that until debt A is fully paid off, you aren’t going to worry or stress about the others – they’re taken care of receiving minimum payments, so they don’t need your attention.
Now, you have one debt to pay off and it’s £250. You’ve worked out your budget, so you know that there’s a certain amount every month that you are able to put towards your debt payments (on top of the minimums), let’s say it’s £50. Now, every month when payday rolls up, you need to pay that £50 off your debt as well as the minimum payment for that debt (let’s say the minimum payment was £10). Now, in four months that debt is gone, it’s fully paid off.
This is the beauty of the snowball method; you get a quick achievement. This means that you feel motivated by the win that you’ve had and feel ready to tackle the next debt. The best part is that for every debt paid off, you free up a little bit more cash that was previously being made as the minimum payment.
So now debt A is gone, you focus all of your attention on debt B. Let’s say that the minimum payment for debt B is £35 – you can now pay the budgeted £50 that you were using to pay off debt A, the £10 that you were previously using to cover the minimum payment for debt A, and £35 which you’ve always had budgeted to pay debt B – that’s a total of £95 per month that you’re paying off debt B, so it’s gone in about three months.
Keep doing this until it’s all gone – the time between your wins (i.e. a fully paid debt) will increase, but you’ll have got into the swing of things and have a more habitual attitude to paying off your debt.