OppLoans Word of the Week: Debt Snowball
Paying off your debt is like losing weight: If you don’t have a plan, your chances of success are slim. Before you put a single red cent towards debt repayment, you need to have a strategy in place. Otherwise, you’ll find yourself sitting there, months later, staring at bills that seem just as high as before, wondering where you went wrong.
The Debt Snowball is one such plan: it is a method of debt repayment that keeps things simple. While not everyone thinks the Debt Snowball is the best way to go, most people would agree that it’s a far better plan than no plan at all.
How Does the Debt Snowball Work?
This image is probably familiar: A person rolls a snowball downhill and it keeps picking up more and more snow, getting bigger and bigger, so that by the time it reaches the bottom of the hill, it’s practically a snow boulder. Well, that is where the Debt Snowball got its name.
With a Debt Snowball, you lay out all your debts and you organize them from largest to smallest. Next, you set a strict budget that frees up as much money as possible for debt repayment. You continue making the minimum monthly payments on all your debts, but you take all that extra money and pay it towards your smallest debt.
Once that smallest debt is paid off, you take all that money and you start putting it towards your next smallest debt. But here’s the thing: you also add the money that you were paying towards your minimum payment on your smallest debt. For instance, if your smallest debt had a monthly minimum of $15, you would take that $15 and add it towards your next smallest debt.
Every time a debt is paid off, you add the amount you were paying towards its monthly minimum towards the next largest debt. This way, the amount you are putting towards debt repayment grows bigger every time a new debt is paid off.
The greatest benefit of the Debt Snowball is encouragement. By paying off your smallest debt first, you’re going to get that early victory that will help you keep going. Because making a plan is one thing, but sticking to that plan is something else entirely.
Now get rolling!
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