This morning, I just received a letter from a bank about my credit card debt. My mom called me telling me that another bank called in and asked me to pay my credit card debt.
In times like this, you always think of paying the debt as quickly as possible. Unfortunately, most debt balances are much more than what we can offer to pay at this time. Debt is an awful thing especially if it has high interest. Imagine paying 3.25% per month in addition to the 500-peso overdue fee regardless of the balance. It’s like being a slave worker for the bank. The good thing is that there are methods to reduce payments much easier.
Debt Snowballing is a term popularized by Dave Ramsey, well-known “reduce debt” guru. It was specially created to pay off credit card debt. Without further ado, here’s how Debt Snowball works.
- In the order of debt balance, list all the debt that you have with the least balance on top - Here, you have to list everything and I mean everything even the small ones. Remember that the goal is to get rid of debt, all debt.
- Calculate how much money you can allocate to payments every month - You should have a budget of how on everything. Food and transportation are important but you should also allocate budget for bills and debt payment. Remember that the budget should be enough to pay more than the minimum payments of all balances.
- Make minimum payments on everything except the one with the least balance - After making minimum payments on everything, all the extra money should be poured into paying the smallest debt.
- After you’ve paid off the debt with the least balance, do it all over again - Pay off the next smallest debt as soon as possible while making minimum payments on the rest.
People might think, “Why pay off the smallest debt quicker? Isn’t it better to pay off the high interest rate debt first?”. While this may be true, it isn’t the goal of the Debt Snowball method. The biggest benefit to paying of the smallest debt because it is faster. It gives someone the psychological momentum when he sees results much faster. Paying off the bigger debts which takes a longer time might lower the motivation of a person to pay debt if he/she doesn’t see results sooner.
Debt Snowball is a method I surely recommend to anyone with debt. Any debt. It has helped me a lot in the past and it is still very helpful until today.