The Snowball Effect: Eliminating Debt, One Balance at a Time

 

Did you know that, of American’s who have debt, their average credit card debt is around $15,422? That number is not only large, but it’s extremely intimidating to those looking to free themselves of monthly interest payments. While there are tons of different methods to resolving personal debt, one that has recently gained popularity is called the “Snowball Effect.” In fact, this strategy has been proven through research to be the most effective in fully eliminating debt, not because it’s the most financially savvy, but because it’s got built in motivation for the participant.

The way this method works is by paying off different debt amounts one by one, starting off with the smallest overall balance and working toward the larger balances. Say you have three debts, each with a balance of $100, $500 and $1,000, respectively. The plan is to pay the minimum balance on the two larger debts while you work to pay off the smallest debt. The hardest part is determining how much you can afford to add to your smallest debt’s payment. If your minimum payment on the $100 balance is $10, then try doubling it and paying $20 each month instead. By slowly eliminating that balance, you will eventually pay off the smallest debt entirely.

Once that debt is gone, take the monthly amount you were paying toward the smallest balance and apply it to the monthly payment for the balance of $500. So, if your minimum monthly payment costs $50, you’ll now be paying $70 toward this debt. When this balance is paid off, you move on to your largest debt and apply those payments until all your debt is gone (for a more detailed example, visit this article for a great 5-balance explanation).

While some would argue it’s more cost effective to pay off the balance with the largest APR first (and they’d be right), having those early successes provide you with motivation for moving forward. If you can actually see your debt disappearing, you’re more likely to follow through to the end.  With all the extra monthly income, you can start building a savings account or an emergency fund!
 

Have you ever tried the Snowball Effect? Tell us about it in the comments below!

If you like this article, be sure to check out “3 Steps to Digging Out of Debt.” 

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