Got Debt? Trying Snowballing

Winter technically ended on March 21st, but snowballing debt is a great strategy any time of the year. Debt can either be your best friend or your worst enemy. On one hand, it can be an excellent way to acquire assets when you don’t have the full capital upfront. On the other hand, using it from either bad spending habits or simply a lack of options can steer people into the rabbit hole of financial burden. The reality is that unless you are acquiring long-term appreciating assets with it, it's probably an unwelcomed guest at the dinner table. While there are lots of ways to approach this, there is one that has been an incredibly effective way of tackling it for most people. Drum roll please… ??

The Snowball Method

When you are dealing with multiple balances to tackle, this strategy helps you organize them into a simple, yet effective formula. You tackle debt one at a time starting with the smallest balance. As soon as you free up that balance, you also free up your minimum payment tied to it. With this minimum payment now free, you use it to tackle the next debt. By doing so, you are increasing your positive cash flow one debt repayment at a time.

All right, that’s a lot of words so here's a couple of pics for my visual learners. Let’s say we have someone with this example:

In this assumption, we are going to assume we have an extra $10 per month to use for our debt repayment. Debt #1 is the smallest balance, so we will be tackling that first. With our extra $10, we will pay that down every month as shown below:

With more than the minimum amount being applied to the balance of Debt #1, the balance starts shrinking. We continue this method until the balance of Debt #1 is gone. Once you pay that off, you effectively free up the $10 minimum payment of Debt #1 and now have a $20 monthly total to use:

?$20 Breakdown:

• $10 extra payment originally used to pay down Debt #1
• $10 minimum payment we freed from Debt #1

Now you take the $20 monthly amount and apply that to the next balance of Debt #2 as shown below:

Once again, you continue this process until the balance of Debt #2 is down to zero. As you complete this, now you free up $20 from the minimum payment of Debt #2. This now gives you a total of $40 monthly to apply:

?$40 Breakdown:

• $10 extra payment originally we used to pay down Debt #1
• $10 minimum payment we freed from Debt #1
• $20 minimum payment we freed from Debt #2

?Repeat again for Debt #3

With the $50 minimum payment freed, now we have $90 monthly total to use.

?$90 Breakdown:

• $10 extra payment originally we used to pay down Debt #1
• $10 minimum payment we freed from Debt #1
• $20 minimum payment we freed from Debt #2
• $50 minimum payment we freed from Debt $3

And now onto the last debt!

And voila. This person is debt-free!

Like compounding interest, each freed minimum cash flow payment continues to expand as each balance is paid off. Now not only are you able to pay off your debt, but you also now free up $190 of positive cash flow to invest or treat yourself with. Cha-ching.

The Snowball Method is one of many strategies you can use to tackle debt. Curious which one is the best for you? Shoot me a message and let's find out together! Connect with me?HERE!

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