How I Was Able to Pay My Debts Using the Snowball Method

Image from ellenlpolk

Last time, I blogged about how I was able to pay my debt that is 5x my salary. I particularly wrote there devising your payment methods in order to pay your debts.

Here’s my mechanics:

“The proper way to do next would be of course to pay the debts. I examined my debts from the different credit cards and from there sort it from the smallest amount to the next. I also wrote down the minimum payments needed. There are varied strategies to pay off your debt. However, as for my case I wanted to tackle the smallest amounts first because such goals are considered small and I know I can be able to complete it in the soonest possible time. Considering that my salary is small as compared to my debt amounts, I see to it to pay the minimum amounts of the other credit cards. Then I leverage and put more value to the smallest credit.”

Little did I know that this payment method has a name. As a matter of fact this is already a popular means in order to get rid of those pesky debts. And this is called the Snowball method.

Why Snowball?

We might not have snow in the country but I bet you are aware how a snowball is formed. This usually begins with a little snow ball and when we roll more snow on it, it will become bigger and bigger. Well, I wish to experience making one in the near future. So exactly how does this apply to paying off our debts?

Simple.

You roll payments from the smallest debt to the largest debt.

Snowball Method Explained

The snowball method is relatively easy to do. Anyone can do it and if done right can really help to get rid of debts fast. Allow me to explain in detail how this works:

1. Start by listing down your current debts, minimum payment and sort from smallest debt to the largest debt.

As a form of example, here’s how it will look like:

Credit Card 1 = P5,000 (minimum payment P300)
Credit Card 2 = P15,000 (minimum payment P1,000)
Owing from a friend = P30,000 (minimum payment 1,000)
Credit Card 3 = P50,000 (minimum payment P3,000)

2. Pay the minimum payments

Knowing the minimum payments can help you slowly alleviate your debts. However, more than that, it is our intention to pay those debts one by one. For that example above, we need to erase Credit Card 1 debt of P5,000 first. Hence pay the minimum payment of 1,000, 1000 and 5,000 for the second, third and the third debt.

3. Allocate budget to paying the debts

It is important to be able to identify from your budget just how much will be directed to debt elimination. Say for instance you set aside 50% of your net salary to it. You might also want to cringe on spending especially wasteful ones and wants. Convert those spending to debt reduction payments.

4. Pay more for the top debt.

Here is where the snowball method comes in action. Let’s just say your net salary a month is P20,000. Since you budgeted 50% of your salary for debt reduction, hence P10,000 should be directed for debt. We are required to pay minimum payments for the rest of the debt. From Credit Card 2 to Credit Card 3, total minimum payment is P5,000.

Credit Card 2 = P15,000 (minimum payment P1,000)
Owing from a friend = P30,000 (minimum payment 1,000)
Credit Card 3 = P50,000 (minimum payment P3,000)

So, the remaining 5,000 will be perfect to get rid of Credit Card 1. So Credit Card 1 cleared.

We now have three remaining debts. So pay minimum payment for the last two debts. Whatever would be the extra amount will now be poured towards clearing Credit Card 2. If you have unexpected bonuses and extra money get 50% or better yet the 100% and compound it to your salary so you can quickly pay Credit Card 2. Once Credit Card 2 is cleared, the minimum payment would now be smaller and the amount you can afford to pay for the succeeding debts will get higher. Sooner you will be able to pay all of those debts.

So basically you are taking those amounts and compound it to the debts and the next debts. The more money you saved apart from your budget, the bigger would be the money you can chip in order to eliminate debt.

Why Snowball is Effective

Being able to eliminate a debt gives you a sense of fulfilment. You will see progress whenever you erase those debts. Then this will motivate you to clear even more debts especially the larger ones. By the time you are ready to pay the large amount, you will already have more cash with you since the smaller debts are eliminated. You can then be able to focus your money and your effort to pay most especially if you will only have one debt left.

Of course if you have slowly cleared your debts, as much as possible, do not incur more debts. Instead use those extra money for savings and building up your future funds.

This works for me, I hope this works for you too.

P.S To those doing the 52 Week Money Challenge, it is Week 24 already! Did you deposit the next amount yet?

P.P.S Want to know more about investing, savings, stock market and more, check out my reference here. You can download free ebooks and resources too. 

P.P.P.S I am also sharing my stock market secrets and information via these resources.