According to the Debt.org, the average credit card debt of the Americans is about $8,400. Many people are struggling every month for paying any type of loans, for example, student loans, mortgage debt, credit card debt, and any other loans. Some of them may also take personal loans for any of their needs.
When you are in this situation, you may be stressed in having a lot of debts in your daily life. These debts may lead you to have less money for the other expenses, accumulated high-interest payments, and also bad credit score in the future. However, you should never have to worry. There is an option that you can take for solving your debt problems. This solution is called the debt snowball method.
What is the debt snowball method?
The debt snowball method is introduced by the personal finance expert Dave Ramsey. This method involves paying off the smallest debt first, then you can continue to the other debts once the first debt is paid off. Here are several steps that you can follow for doing this method.
- First, you have to set up a budget for paying the minimum payment on all of your debts monthly.
- As an addition to these minimum monthly payments, you can also prepare your budget for paying an additional amount of money on the smallest debt you have. Even it is small, it is okay for you to keep doing this step.
- Keep doing it until you pay off the balance from your smallest debt. Then, you can follow a similar repayment plan with the other debt. Don’t forget to add the monthly payment of your first paid-off debt to the next debt.
- Continue the process with all of your debts. At the end of this process, you will reach the highest amount of debt you have and pay it off.
Example of this method
Let’s say your credit card has a balance of $500 and a minimum payment of $25. Then, you decide to put $50 as an addition to your minimum payment. The total monthly payment for your credit card debt will be $75. You are going to stay in this phase until you pay off that $500 bill completely. Then, you can take the $75 for paying the next smallest debt that you have.
Let’s say the minimum payment of your next debt is $35. You are going to pay the second debt for about $75 + $35 = $110 every month. Keep doing this step until you pay off all bills and debts that you have in your account.
Learn more about the debt avalanche method
When you are planning to do the debt snowball method, you also need to know about the debt avalanche method. This method is slightly different from the debt snowball method. You can pay the minimum payment for all debts that you have every month. Then, you can add some additional funds for paying debt with the highest interest rate first. You can follow the same procedure as the debt snowball method until you pay off all debts that you have.
Which is the best method between the debt snowball and debt avalanche method?
Different people may have different preferences when talking about the best method for paying their debts. However, the debt snowball method can be better for you who only have a limited budget for paying your monthly payment. This method has a higher possibility to help you pay off all debts that you have than the debt avalanche method.
Motivation is another reason why you may want to consider using the debt snowball method. Once you pay off the debt with the smallest balance, you are going to see improvements on your account. You can become motivated to pay other debts faster.
You need to learn how you can get out of debt fast. It is a good idea for you to create a budget depending on your paycheck amount. Write down all the upcoming expenses that are going to occur in the next month. Therefore, you can manage the right budget that can be used to pay off any of your debts. Cut down any unnecessary expenses and stop taking any more debts before you can pay off any loans.