Video Transcript
One of the biggest if not the single biggest source of stress in many of our lives is debt.
There's no real other way to put it, “that sucks, nobody likes it, period”. So how do we get rid of this burden hanging over our heads?
There are many strategies out there for paying down your debt, but I think there's two in particular that you might have heard of; they are the debt snowball and debt avalanche methods.
Both of these techniques are great ways to pay off your debt, but as with anything out there, there’s some pros and cons to each. Also, as you probably guessed, the snowball and avalanche methods use snow as a way of illustrating how they work to help you pay off your debt.
Let's focus on the debt snowball method.
The debt snowball works like this; I want you to imagine you're at the top of a snow-covered hill okay. You reach down and you pick up some snow and you pack it into a small snowball. Then you take that ball and just roll it down the hill, and so as that snowball rolls, it starts to pick up snow and it gets bigger and bigger. Then at the same time, it's also starting to roll, faster and faster, and every second this snowball is getting larger and picking up speed. By the time it reaches the bottom of the hill, its six feet tall and its moving fast enough to take out a car.
Now I want you to hold that image in your mind, we can take the same concept and apply it to our debt. Let's say we have three different credit cards, each with a balance. The first card has a balance of fifteen hundred dollars the second card has a balance of five hundred dollars and the third and final card has a balance of three thousand dollars. This totals to five thousand dollars of credit card debt, so the first thing that we need to do is organize all of this debt by balance, putting the debt with the lowest balance at the top of our list.
This would be the credit card with the five hundred dollar balance, followed by the fifteen hundred dollar card, and then the three thousand dollar card. Next we look at how much the minimum payment is on each card. So to make things easy let's just say the minimum payment is one percent, this means that we would have to pay in total, a minimum payment of fifty dollars each month towards these credit cards. So I went back and I took a look at our budget, okay and I know that we want to get rid of this debt as fast as we can and I found that we have an extra $100 available each month to pay towards our credit cards this is when we put the snowball method to work.
Our first step is to pay the minimum payment of $50 on all of our credit cards. We got to take care of this step first, I don't want to get in trouble getting any fees for not paying those minimum balances. Those have to be taken care of first.
This leaves us with fifty dollars of the one hundred dollars remaining. The snowball method works by attacking the lowest debt balance first this. It’s like grabbing that little bit of snow, and making that first snowball and rolling it down the hill. So we take that remaining fifty dollars and we pay it towards the credit card that had the original five hundred dollar balance, making our total payment to that card fifty five dollars for the month and this helps speed up how quickly we can actually pay down that card. We're going to keep doing this until that first card is paid off.
Once that card is paid, our snowball gets bigger so we take that $55 payment that we're paying towards that lowest balance card and we shift that towards the next lowest balance. This would be the car that had a $1500 balance and a minimum payment of fifteen dollars. This increases our payment to seventy dollars a month.
This begins to speed up the payment on the second card and soon this card is paid off as well. Now our snowball is getting even bigger and is at its top speed as we take that full $100 dollars we have available and apply it to our largest and only remaining credit card. This $100 payment hits this credit card like a speeding snowball and wipes out this debt in a matter of months and now we're completely debt free.
This is a huge accomplishment, the snowball method is my personal favorite way of paying down debt and this is actually what I used to pay down the $27,000 in credit card debt that I had back when I was younger.
But you know with all things there are always some pros and cons so let's run through a few of them here.
So. the biggest pro of the snowball method is that you get to experience several wins throughout your journey, as we focus on just paying off those smallest balances first, focusing on debt with small balances versus spreading your payments evenly across all that you have. This allows you to see your credit cards and lines of credit get paid off quicker giving you that little boost of motivation and joy along this very long journey that is paying off debt. Another pro is that many will get their first win pretty quickly using this method, in that sense a lot of us have some relatively small debts mixed in with the larger debts. With the snowball, method paying off a small balance of let's say $500, can happen pretty quickly and sometimes even within a few months and getting that win quick is really great because that's the motivation that's going to keep you going over this this long journey of months and often times years of paying down debt.
Now there is one con to this method that I wanted to mention, and that is that the snowball method it completely ignores interest rates so I don't know if you notice but I didn't mention interest rates at all. Once in the example, I gave you the only thing that matters with the snowball method is that you pay your smallest balance first and your largest balance last, so this may mean that you end up saving the debt with the highest interest rate last, causing you to pay more in interest over the course of your whole journey .
So I ran some numbers and I use my example with a few tweaks because you know the example I used was simplified and the minimum payments were lower than you'd probably end up paying. The results do show that it would be cheaper and faster to pay down your balances based off of interest rates but the difference is it's pretty small, so if you're someone who's dealing with debt from multiple credit cards and loans, and you want some early wins in your journey, I think the snowball method might be the best method for you to try. If you're someone who's actually tried out the snowball method in the past, I want to hear about your experience so let me know how it went and if you liked it.
