Debt Repayment Snowball Method
The debt snowball method has been popularized by Dave Ramsey, financial writer and host of a radio show which goes by his own name. This method is used primarily to reply multiple debts owed on account of excessive revolving credit, such as credit cards.
The basic concept is that you prepare a list of all debts, starting from the largest amount and moving on until you note down the last and smallest debt you owe. The next step is to work out the minimum payments on each debt, and allocate funds to pay only the minimum each month on each debt. In step three, you manage to arrange for an additional amount, in excess of the sum total of all the minimum payments to each debt, and add the additional amount to the smallest debt. Thus, after some time, you are now making payments on all the debts, plus managing to payoff and clear the balance for the smallest creditor. You then apply the same principle, and start to add some excess amount to the second last creditor, who is now the last one on your list. Make note that this time, you have an excess amount which is the sum of your previous excess amount and the minimum payment required for the now cleared smallest debt.
This is a systematic and orderly way of clearing your debt, and the debt snowball method has been widely praised and accepted as a feasible means of debt repayment. This method is not some trick, and needs a lot of discipline to pull off. But the advantages are obvious. First, and most important, is the advantage of reducing the number of debts and the total amount owed simultaneously. This gives not only more money which can then be used to clear the rest of the debts faster, but also a psychological boost and will power to continue and clear all remaining debts.
Secondly, the simplicity of the method is very attractive to people reeling under debt. When you find yourself in such a situation, it is not easy to calculate the combined debt, and after factoring in interest rates, amounts, late payment charges, and other related issues, the question of how much you should pay into which debt becomes increasingly complex as you make payments every month. It is highly more likely that you will end up making wrong decisions which will mean either you increase your debt or end up paying more. The debt snowball method puts to rest all these worries. The only factor to be considered is the amount of each debt. Make minimum payments on all debts, pay off the smallest debt as fast as possible, and continue doing it.
And for making it even easier and simpler, and to give you an overall picture of the exact amounts you’ll be paying into each debt over a period of time, financial services providers have come up with a debt snowball calculator, which will take input from you (number and amount of debt, interest rates and minimum required payments for each debt, excess amount you can add in each month over and above the combined total of minimum amounts ) and provide you with a chart detailing the exact payments you need to make to each debt until such time as all debts are cleared. Once you have the chart, all you have to do is follow it.
Please not that the debt snowball method is only one of a number of debt repayment strategies, and you are advised to consult your financial advisor, as well as making sure that you have the capacity to pay the amounts necessary. If you do not have the capacity to make even minimum payments, the issue of using a debt repayment strategy becomes a moot issue.