The “Snowball” Method
This week we will be continuing our series on debt reduction by discussing one of two general debt reduction strategies. In this post we will be exploring the “Snowball” method, where you tackle your smallest debts first and work your way towards your larger debts. This post will outline how to apply the “Snowball” method to your debt. The Snowball refers to how you first pay a little bit of debt off, then slowly you pay off more and more like a snowball gathering snow.
Keep everything in perspective
This strategy is good for people who feel overwhelmed by the amount of money they owe to various creditors. Reducing your list of creditors by paying them off one by one in manageable installments, the list becomes less daunting. By the time you have to tackle your largest bills you can allocate all of your monthly debt paying funds towards that one bill, bringing it down quicker than if you were trying to pay off all your debts at once. This also reduces how much money you will have to pay in interest, since you will no longer have to pay interest on debts you have paid off.
Organize your Spreadsheet
If you haven’t already created a spreadsheet tracking all your debts, their total amounts and their interest rates you should do so. Organize this spreadsheet so that your debts go from smallest to largest. By focusing on your smaller debts first you will be eliminating them relatively quickly, freeing up the funds used to pay them off for your other debts.
Pay your debts
If, for example, you have a Visa card balance of $3000, a car payment of $2000 and an overdue phone bill of $400 you should start by paying off the phone bill so that the money you have been using to pay it off can go towards your car payments and then your Visa bill. You should always pay at least the minimum amounts owed on your debts in order to avoid damaging your credit score more, but you really should be paying as off as much debt as you can afford. If you have $500 per month to put towards debt then use the first month to pay off your $400 phone bill and the interest it will have accrued over those months. You can now spend the $500 per month on paying down your car payment, and then tackle your Visa balance. Be sure to budget enough money to make the minimum payment on each of your debts so you avoid damaging your credit score and angering your creditors.
Next week we will be discussing another debt management strategy you could employ.
If you are still feeling overwhelmed by your debt call Tim Lacroix today at 403.648.1541 to book your free, one hour Financial Planning consultation.