When someone is in debt and struggling each month to pay the monthly payments, their mind can get a bit clouded, yet focused. Try to imagine that.
They are focused on getting out of debt, but clouded due to the fact they cannot see outside of the bubble they are in, the debt bubble.
All they are seeing is how fast the first of the month arrives, and the bills are once again due, and how quickly the interest and charges are mounting on the accounts; especially credit cards.
It is easy to feel overwhelmed and swamped by the bills and debt, and not be thinking as clearly as you would like to be.
However, there are ways to get out of debt, many of them. Some you can do on your own, and some with the aid of third parties.
And sometimes as in “Occam’s Razor”, the simplest answer may be the best, or better way to deal with something; in this example debt.
One simple way is the “snowball effect”.
What is The “Snowball Effect”?
Think of a snowball rolling down a large hill that is snow covered.
As the snowball rolls downhill, it gathers more snow, and with the gathering of more snow, becomes larger and larger, until when it reaches the bottom of the hill, it is as large as it can be.
How Does it Work With Debt?
This is how we are going to approach our debts, like a snowball rolling down a hill, gaining momentum and getting larger, or in this instance, our debt getting smaller.
The first step is to list all your debts in order, starting with the smallest balance, moving upwards to the account with the largest balance.
We are not concerned with interest rates and which account has the lowest or best interest rate, just the balances for now.
Next we are going to list the minimum monthly payments by each account, the minimum payment that would be accepted each month.
Then we do an income and expense sheet, listing all our bills and income, including the minimum payments to our debts we have. We are looking for any surplus money to use to get this snowball rolling.
We are going to use this extra money each month to begin paying more than the minimum monthly payment on the first debt we have on our list, the account with the lowest balance.
By paying this extra money/payment each month, we will pay the account off at a quicker rate.
Once this smaller account has been paid in full, we move on to the next account, the next larger balance account.
We then pay the minimum payment for the smaller account we just paid off, in addition to the extra we had been paying towards the account, and add it all with the minimum monthly payment to that next larger account; which will pay it off early.
You continue this process of the snowball/monthly payments getting larger and larger, until all the accounts are paid in full.
Your debts are paid off, you did not use any third party help, and you did not impact your credit by using any forms of insolvency, or debt management.
Besides getting out of debt, there are some positive aspects to this method of paying off your debts.
By beginning with the smaller or lowest balance account, and paying it off quickly, you see results, which helps to reinforce you in what you are doing.
You will pay less interest over time on the accounts.
And by the time you get to the last account, you will be making sizeable payments each month towards the balance.
So snowballs, they’re not just for Winter any more.