“ If you think nobody care if you’re alive, try missing a couple of car payments.”- Earl Wilson
Imagine a snowball rolling down a hill and getting bigger & bigger with more snow accumulated on its way down. This effect of accumulating smaller things into bigger one in due time is termed as Snowball effect. It explains when something grows in importance or notoriety in an increasingly faster rate. In this article, we shall look at what is Debt Snowball Method.
The snowfall effect can both positive and negative based on its applications and occurrence. On a positive side, this method or effect can be used in our personal finance to free ourselves from debt in a motivating way and on a negative side, this effect can cause a roller coaster of unpleasant incidents from small minor incident to huge devastating ones. It can be seen in any of our political protest or in our personal emotional situations.
The positive aspect:
Taking on positive note, the debt snowball method can be effectively used in our personal finance sphere to free ourselves from ever-trapping debt. It involves making minimum payments on all debt, then paying off the smallest debts first to get them out of the way before moving on to bigger ones.
The debt snowball method can be valuable for maintaining energy and dedication while paying off debt. Moreover, the advantage of the debt snowball is that it helps build motivation for debt repayment. Therefore, the debt snowball method involves paying off the smallest debts first to get them out of the way before moving on to bigger ones.
“ Your personal finance is always 20% head knowledge and 80% behavior. You need some quick wins in order to stay pumped enough to get out of debt completely.” – Dave Ramsey
With the debt snowball method, we will be able to see the progress of our debt repayment clearly and in much faster manner.
How does the Snowball Method work?
Let us see how Debt Snowball method works with a practical example from our dear friend K. K has pile of debts such as Education loan, car loan, personal loan and credit card bills. With his monthly income of 40k, he has to pay all his debt and spend on personal & home expenses.
|Loan types||Loan Amount (lakhs)||Loan period (years)||Interest rates (%)||Monthly repayment (EMI)||Interest paid on average (monthly)||Total interest to be paid|
|Education loan||10 lakh||12||10.75||12400||5444||7.83lakh|
A credit card from SBI with limit of 1 lakh with billing cycle of 50 days ,annual fees of 1499 and interest rate of 3.35% per month(40.2%per annum).
In the Debt Snowball method, Mr K pays the minimum monthly payments to education loan(12400),personal loan (6717) and credit card (varies according to usage). After paying minimum amounts to big loans, he pays as much as possible to vehicle loans. Lets say he pays 4500 instead of 2995,the repayment period reduces from 60 months to 40.
|Monthly Payments (Rs)||Repayment period or tenure (months)|
The above shows the increase of monthly payments to the vehicle loan and reduction of repayment period. If K pays 10000/month, the debt gets closed or cleared within 18 months instead of 60 months.
After the closing the smallest debt(vehicle loan),K can move-on to his next smallest debt (personal loan) and repeat the same process to other debts. Closing off a debt ,even the smallest one brings tremendous happiness and the happiness becomes an incentive to next debt closure.
Let us recap the steps involved in Debt Snowball method before closing off the article.
- List all your debts or loans from smallest to largest regardless of interest rate.
- Make minimum payments on all your debts except the smallest.
- Pay as much as possible on your smallest debt.
- Repeat until each debt is paid in full.
Snowball method can be used in all spheres of our life from managing our money to monumental social change. We need to start small and then gradually go larger & larger. The sense of achievement or finishing off one debt or the small win will definitely boost our confidence and strive us for more. Add to it. the small win also becomes our motivation to live a life of debt-free and stress-free.
We, in ArhaathS’ ,request to try out the method and use it with full zeal. The result will be more rewarding and motivating. We can see the progress much faster compared to other methods like Debt Avalanche, Balance transfer and Debt Settlements which can also be used. The technique may or may not suit our requirements or mindsets. Choosing the right one depends on the types of debts we owe and our priorities.