When you are in debt you can do everything and anything to get your life financially back on track and to pay off your loans. However, if you knew where to start wouldn’t it be a bit easier? The process can be very overwhelming and scary, which can cause confusion when gathering your debt totals and your financial statements. However, there are many tools related to debt deduction, which have proved to be both effective and helpful.
Okay, so you know you are in debt and the first thing you should not do is panic. What had to happen has happened and now it’s time you created a game plan. There are several ideas and strategies you can use, but a popular one is referred to as the debt snowball.
How Does The Debt Snowball Work?
Is exactly what you may be thinking. The debt snowball starts of by you paying off the debt with the least balance first. The debt reduction method means you calculate the balances on your loan accounts and arrange them from lowest to highest. After this, you need to total the minimum balances of all the accounts and start paying at the minimum amount that is due. You need to stay dedicated throughout this first step of the debt snowball process.
Once you have fully paid off this balance, you can then move on to the next debt that is in the list. Included with this will be any extra payments that you have made towards your initial debt and your minimum balances. The debt snowball strategy will increase as more of your debts have been paid off. Hopefully, it won’t be long until the debts are paid off and you are totally free of debt.
Simple Stages of the Debt Snowball
You’ve made your game plan and you know exactly what you are doing, you also need to be familiar with the basic stages of the debt snowball tactic:
- Firstly, you need to list all your debts from the uppermost to the lowest.
- Secondly, you need to pay the smallest due for each of the accounts.
- Thirdly, you can either earn extra money or cut down on your expenses, or use any extra funds you may have for the debt that has the least balance.
- After this account is fully paid off, you can include any extra payments you used towards your initial debt and the old minimum payments and total these.
- With this new sum, you apply it to the next debt on your list, which would be the second-lowest.
- The basics listed above need to be repeated until all of your debts are paid off.
A main benefit of the debt snowball method is you can hit some rapid wins, as you will be dealing with the lowest account first. This balance should be paid off around a few months or maybe even weeks.
What You Need To Know About the Debt Snowball Strategy
Before you start to consider this method, it is important you are familiar with a few factors. This method is a popular way to help pay off debt, but depending on your situation it may not be for you. You may also want to consider the debt avalanche method, which includes paying off the debt starting with the highest interest rate first. Both options need to be considered, and in the end you need to select which best suits you and mostly fits your situation. Once you have considered everything, and you do select the debt snowball method, it is important to keep the following things in mind:
- Give lenders a heads-up – contacting your lender and telling them to add any extra payments to the main balance of the loan is something you may want to do. Financial institutes like mortgage lenders or auto will apply additional money towards the subsequent payment. Basically, this splits the payment between the principal and the interest. What you want to do is get out of debt faster, so you may want the funds going to the major account, which will save you money on interest.
- Selecting the high interest rate – you do not have to fully stick to the basics of the debt snowball, as you may want to start off with paying the highest interest rate first. The approach will obviously remain the same, but you may also be saving a lot of money.
- Do not put your retirement in danger – this strategy is effective for a little period of time, but it also needs careful implementation. Whilst paying off debt, many individuals choose to stop retirement contributions or monthly savings all to get out of debt a lot faster. Doing this is smart, but doing it for too long can result in sacrificing your retirement and quality of life, just so you can quickly get out of debt.
No matter how long it takes to pay off your debt, you need to stay dedicated and motivated and avoid any short-cuts, which could actually come as a risk to you in the long term.