Snowball your debts

smash your debts May 30, 2022
Smash down your debts: Snowball your debts

One of the quick and easy ways to make a plan to Smash Down Your Debts is to "snowball" them.

The visualisation is this.  Start at the top of the mountain with a small snowball.  This is your "above minimum" payment of your smallest debt.

Then, give that little snowball a push.

As the snowball rushes down the mountain, you will start to pay off your debt quickly.
As your very first debt (that smallest balance) is paid off, then we aim that snowball to the next smallest debt, and pay the minimum amount  PLUS the amount you were paying towards the first debt. 

The snowball gets bigger, and packs more punch when it hits the next debt.

This strategy to pay off your debts quickly uses the same amount of money for debt reduction the whole way through.

Say you have 4 loans (from smallest balance to largest) - credit card, personal loan, your car loan, and your home loan. 

If your total debt repayments for these loans are $50pw + $120 pw + $220pw + $450pw, then your total payments are $840 per week.

After the credit card is paid off, your total debt repayments are still $840 per week, and you will then pay $170pw towards the personal loan.  This will make a signification reduction in the debt over a smaller amount of time, and it will be paid off much quicker now you have added more to the minimum repayment amount.

When the personal loan debt is paid off, you will aim your snowball towards the car loan and the total repayments you make will be $50+$120+$220 = $390.  You now only have 2 debts less to pay, and are still paying $840 per week towards your debts.

What will make this snowball even bigger?  By adding any additional money to your debt reduction strategy.  If you sell something you no loner need, then add that cash to the debt.  If you get a bonus bit of cash, then add that to your debt.  The more money you can add to your debt today, the quicker it will be paid off and the less interest you will pay to the bank overall.

 This concept was learned via Dave Ramsey.

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