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What is the Snowball Method to Paying Down Debt?

By Debt.ca on July 6, 2021 No Comments
Debt snowball plan under magnifying glass

What is the Snowball Method to Paying Down Debt?

In a report by Bloomberg, mortgages drove Canadian consumer debt to $1.7 Trillion. In fact, mortgage borrowing was up 41% in Q1 2021, compared to the year prior. When it comes to paying down debt, getting started can sometimes be the hardest part.

Just like when we first start working out, getting to the gym is the most difficult. But, once you’re there, it’s easy to be inspired by others and to pick up that weight or get on the treadmill.

The same goes for your personal financial fitness. Many of us don’t even know where to start when it comes to paying our debts off. Especially if we have debt from several sources.

If you are someone that needs to see immediate results in your efforts, then the best way to tackle debt for you could be the ‘Snowball Method.’ This method promotes the idea of paying down debt from your smallest loan to your largest.

Unlike the ‘Avalanche Method,’ described in another post, the snowball method gives us instant gratification. It isn’t the cheapest way to pay the debt down, but it’s the easiest way to stay motivated.

Getting the debt snowball method started

If you decide to use the snowball method to pay down debt, start by listing your debts from smallest to largest. The first entry could be a utility bill that is overdue, a small amount you borrowed from your line of credit or money you owe a friend.

Identify the smallest balance you owe. It most likely will not be your mortgage. Here it is a step-by-step.

List your debts from smallest to largest.

  • Make minimum payments on all your debts except the smallest.
  • Pay as much as possible on your smallest debt.
  • Repeat until each debt is paid in full.

Here is a typical list of debts you may have:

  • Overdue hydro bill $98
  • Unsecured line of credit $235
  • Visa credit card balance $350
  • Loan from mom and dad to fix car $876
  • Student loan $3678
  • Car loan $8345

You would start with the overdue hydro bill, then move to your unsecured line of credit debt and so forth.

Why the snowball method works

Just like striking items off our to-do list, striking items off our debt list makes us feel like we are getting things done. It keeps us motivated, too. According to an analysis done in the Journal of Consumer Research and published in the Harvard Business Review, the snowball method is more effective, because these small wins are a bigger motivator than just paying debt down in order of most expensive.

Sometimes, paying off the smallest bill at minimum monthly payments is all we can afford. As long as you’re current with your debt repayment initiative, you can become debt free in no time. Using extra money towards small debt can result in quick wins.

This strategy is great for anyone who stays motivated by seeing instant results. Someone for example, who is dedicated to getting to the bottom of their to-do list every day. At the end of the day, the debt snowball may work for them. Stay consistent, even if you can only pay the minimum on small balances.

It taps into the same emotion we feel when finishing that to-do list. By crossing small loans off the list easily, we continue to be motivated to pay all the debt down.

Who is it not for?

Anyone who is focused on saving money should not use the snowball method. The avalanche method (eliminating debt with the highest interest rate) is a bigger money saver. But for some, staying motivated is the biggest hurdle. For anyone who likes instant results and staying motivated that way, this is the method for you.

Want to talk to a professional about saving money? Get in touch with a credit counsellor today.

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