With the official first day of Spring in our rear-view mirrors, the last thing you want to think about is snow. But don’t worry — we aren’t talking about the cold, white stuff that collects on the roads and makes driving dangerous.
In the financial world, the snowball refers to a debt management method that helps you pay down bills. Keep scrolling to learn more about this system below.
What is it?
The snowball method is a debt repayment strategy that focuses on paying off your smallest bills first — whether that’s a personal loan, revolving line of credit or credit card. Eventually, you’ll move onto bigger bills, but not before you gain momentum.
This is in stark contrast to another snow-related strategy: the avalanche method. If you use the avalanche method, you’ll focus on the account with the highest interest rate first before moving down through your debts.
Why is it Called the Snowball Method?
If you grew up in a cold climate, you may have spent your winter afternoons as a kid making snowmen.
The easiest way to make the biggest snowball was to start small, pressing a handful of snow into a tight ball and rolling it through the park. The more you moved, the more it grew — gaining in size and speed until you had a base to a large snowman.
The same theory about momentum applies to your finances. Start small to get your debt-paying footing and eventually you’ll gain speed and momentum.
How Does it Work?
Simply put, you’ll focus all your energy on paying off the account with the smallest amount owing — whether that’s a line of credit or a cash advance. Once you’ve cleared this debt, you’ll roll the money you were previously putting towards this old debt into the account with the next smallest balance.
This cycle continues until you are debt-free.
But that goal may be a long way off. Here’s what you’ll need to do to get there one day.
- Organize Bills.
You’ll have to sit down and arrange your debts from smallest to largest. Disregard the interest rates during this step — only look to the amount you owe.
- Pay the Minimum.
Make sure you make the minimum payments on every account. This ensures you avoid late fees while you focus on paying down what you owe.
- Add Surplus.
Take some time to cut expenses and rearrange your spending habits so that you can free up cash. Put any extra cash that doesn’t go towards the essentials into the account with the smallest debt.
- Keep Rolling.
Once you pay off your smallest personal loan or line of credit, use the money you normally put towards this debt to focus on the next smallest account.
Keep at steps 1–3 until you’ve paid off your last and biggest personal loan or line of credit.
Feel Good about Your Debts
Tackling your smallest personal loan or line of credit may help you see the practical results of your hard work. And results feel good.
More still, you’ll build up your snowball, remember? As you pay off smaller accounts, you’ll be able to put more money towards your bigger debts. Eventually, you’ll gain confidence and — more importantly — money as you clear off your final bill.