One of the quick and easy ways to make a plan to smash down your debts is to “snowball” them.
The visualisation is this. Start at the top of the mountain with a small snowball. This is your “above minimum” payment of your smallest debt.
Then, give that little snowball a push.
As the snowball rushes down the mountain, you’ll start to pay off your debt quickly. As your very first debt (that smallest balance) is paid off, then we aim that snowball to the next smallest debt, and pay the minimum amount PLUS the amount you were paying towards the first debt.
The snowball gets bigger, and packs more punch when it hits the next debt.
This strategy to pay off your debts quickly uses the same amount of money for debt reduction the whole way through.
Here’s How It Works
Say you have 4 loans (from smallest balance to largest) – credit card, personal loan, your car loan, and your home loan.
If your total debt repayments for these loans are $50pw + $120pw + $220pw + $450pw, then your total payments are $840 per week.
After the credit card is paid off, your total debt repayments are still $840 per week, and you’ll then pay $170pw towards the personal loan. This will make a significant reduction in the debt over a smaller amount of time, and it’ll be paid off much quicker now you’ve added more to the minimum repayment amount.
When the personal loan debt is paid off, you’ll aim your snowball towards the car loan and the total repayments you make will be $50 + $120 + $220 = $390. You now only have 2 debts less to pay, and you’re still paying $840 per week towards your debts.
Make Your Snowball Even Bigger
What will make this snowball even bigger? By adding any additional money to your debt reduction strategy. If you sell something you no longer need, then add that cash to the debt. If you get a bonus bit of cash, then add that to your debt. The more money you can add to your debt today, the quicker it’ll be paid off and the less interest you’ll pay to the bank overall.
This concept was learned via Dave Ramsey.
Disclaimer: This information is general in nature and doesn’t take your personal circumstances into account. Always seek professional advice for your specific situation.
