Developed by financial coach John Dave, the snowball method or the “snowball effect” is a very popular method which advocates psychology rather than mathematics for the elimination of debts. How to pay your debts? We explain the operation and the strategy linked to this method.
The stages of the snowball method
First step : Establish a list of all debts excluding the mortgage by entering the name of the creditor, the balance due, the interest rate, and the minimum payment that must be repaid each month. Example:
- Student loan – Amount due – interest rate – payment each month
- Car loan – $ 3,000 – 6% – $ 180
- Credit card – $ 600 – 10% – $ 60
- Personal loan – $ 1,500 – 2% – $ 30
- Borrow from parents – $ 400 – 0% – $ 10
Second step : Produce the same list of debts in order of the lowest to highest balance without taking into account interest rates except in the case of a similar monthly payment between two debts of different creditors. Then keep this list carefully, as it is the final list of your payment priorities.
Step Three : Record the due dates for the monthly repayment of each debt. Then make each month the minimum payments for each of the debts entered. In case you find a surplus of money after paying all the debts and your monthly expenses made, make an additional payment to the creditor whose debt is at the top of your list.
Step Four : Once the number one debt is settled in full, continue to make the same payments, but from the second debt. Then apply the amount you paid for the first debt to the second debt by adding their two amounts. You can then redo your list with the new monthly payment amounts. Once the second debt has been paid, continue to apply step four for all the other debts, always adding up the amounts of the debts repaid.
The strategy of the snowball method
The concept of the snowball method is therefore to make small payments (small snowballs) which when the debts are settled progressively increase the payments (large snowball). In this way, the strategy of the snowball method is to quickly see the appearance of regular financial progress which motivates people in debt while respecting the goal of eliminating debts. Even if this method is not necessarily the most economical, because it can generate a little more interest to pay, it is very motivating and allows people in debt to follow a regular payment rhythm which then enters into their good habits. Because motivation is our ally to succeed in any project, whether it is debt repayment or not, the snowball method seeks to find quick and motivating results by playing on psychology more than on mathematical calculations. . “The math seems to lean more toward paying off the higher interest debts, but what I’ve learned is that personal finance is 20% head knowledge and 80% behavior. You need a few quick wins in order to stay pumped enough to get out of debt completely. ”Says John Dave in his book The Total Money Makeover.
The payment of debts generally lasts several months so the best is still to find the method which suits you the best according to your personality, your own financial situation. If you are an emotional person who needs to see steady progress to be motivated, the snowball debt elimination method is definitely the one for you