A Detailed Guide on the Debt Snowball Method
Trying to get debt under control can be challenging and depressing. Just reviewing debts makes most people get a headache. Often, there may be the feeling of just wanting to give up because it is overwhelming. The majority of working people live paycheck to paycheck. The pandemic put added pressure, too, because so many lost their jobs.
If your debts are overwhelming, you may need to consider bankruptcy. If your debts are manageable, you can find a way out if you are willing to follow a plan, stick with the plan for a long time, and make adjustments to your lifestyle.
The main advantage of the debt snowball method is personal motivation. The concept is easy to understand. Make the minimum monthly payments of all debt and then pay off the smallest debts before moving on to others.
Debt Snowball Example
Here is a simplified example of how this works:
Your monthly take-home pay is $1,900.
The rent is $600
Utilities are $200
The food budget is $300
The gas budget is $100
Insurance is $150
This leaves $550 in disposable cash that is available to pay debts.
Debts are the following:
Credit card balances of $1,000, $1,500, and $2,000 for a total of $4,500, minimum monthly payments of $30, $45, and $60 respectively, for a total of $135 per month
An auto loan balance of $15,785, minimum monthly payment of $200
A personal loan balance of $255, minimum monthly payment of $25
A gas card balance of $65, minimum monthly payment of $7
Organizing the debts from the lowest balance due to the highest balance gives these results:
Gas card: $65
Personal loan: $255
Credit card 1: $1,000
Credit card 2: $1,500
Credit card 3: $2,000
Auto loan: $15,785
Under the debt snowball method, using the $550 in disposable income, you would pay the following amounts on the debts:
Credit cards: The total minimum monthly payment for all three of $135
Auto loan: The minimum monthly payment of $200
Gas card: Pay off the gas card completely using $65
Personal loan: Pay down the personal loan with $140, leaving a balance of $115 as the first thing to pay off the following month
It feels satisfying to pay off the smaller debts first and get rid of them, if possible.
To get your debts under control, also take a look at what you are buying. For example, if you also add some high-priced snacks at the food mart connected to the gas station every time you buy gas, consider stopping the purchases of these snacks. Another good idea is to use cash or a debit card to avoid running up your credit card balance.
How Does The Debt Snowball Method Compare To The Debt Avalanche Method?
The debt avalanche method for paying off debts is another approach. It can pay off the higher interest rate debts first and therefore saves more money than the debt snowball method. However, it does not have the same psychological satisfaction of getting rid of some bills for the smaller debts.
Debt Avalanche Method
Using the debt avalanche method to pay off debts used in the example above is done by ordering the debts according to the highest to lowest interest rates charged.
The list of what to pay first would change to this order:
Credit card 1: Balance due $1,000, interest rate 23%.
Credit card 3: Balance due $2,000, interest rate 21.5%.
Credit card 2: Balance due $1,500, interest rate 19.25%.
Gas card: Balance due $65, interest rate 17.5%.
Auto loan: Balance due $15,785, interest rate 14.5%.
Personal loan: Balance due $255, interest rate 12%.
Using the $550 disposable income, the bills paid would be the following:
Credit card 3: Minimum monthly payment of $60.
Credit card 2: Minimum monthly payment of $45.
Gas card: Minimum monthly payment of $7.
Auto loan: Minimum monthly payment of $200.
Personal loan: Minimum monthly payment of $25.
Credit card 1: The remaining amount of disposable income of $213.
By using the debt avalanche method, you will save more interest expenses. However, it may seem like you are making less progress because you will still have the same number of bills to deal with at the end of each month.
What Would You Do If You Won The Lotto?
How stressed out and concerned are Americans about their debts? Yahoo Finance reports that in a survey conducted of 500 Americans, the top choice of what to do with lotto winnings is to pay off all debts. Of those surveyed, 35% said that the first thing they would do with lotto money is pay debts. Living debt-free seems to be the dream of many Americans.
Sharing the Money
The second most popular thing to do with lotto winnings after paying off debts was to share the money with friends and family. Of those surveyed, 23% said they would do this. Older Americans were more likely to share the money than younger ones. Women were more willing to be generous with friends and family than men.
While you are waiting to win the lotto, it is a good idea to consider using the debt snowball method to gain at least a little peace of mind and make some progress in paying off debts.
Conclusion
Getting rid of bills is very satisfying. The best way to accomplish this, especially if you are a younger person, is not to make such bills in the first place. One technique that may be helpful is not to carry credit cards with you all the time. Use credit cards only for emergencies and leave them at home in a safe place.
By using the debt snowball method, you will get rid of your bills one at a time. As the pile of monthly bills that are due goes down, you will feel a great sense of relief and satisfaction that you have your personal finances more under control. Be sure to use the tools at the Goalry Mall to make managing all this effort easier.