Snowball Method is a popular debt repayment strategy designed to systematically tackle outstanding debts. Whether it is the best method depends on the circumstances and preferences of a person. Here’s a breakdown of Snowball Method and factors to consider whether it is suitable for you.
How Snowball Method Works
- List debts from smallest to largest – list debts in ascending order based on outstanding balances.
- Pay the minimum on all debts except the smallest – allocate extra funds towards paying off the smallest debts first while paying the minimum on the others.
- Snowball effect – when the smallest debt is paid off, use the previously used amount to pay the next smallest debt. Continue until all debts are paid.
Pros of Snowball Method
- Psychological momentum – paying off smaller debts first provides a feeling of accomplishment, which motivates you to pay off all your debts.
- Simple and easy – it is a straightforward approach to paying debts, making it easy to implement.
- Reinforce your behavior – with every small debt paid, you gain small victories that reinforce your financial behaviour and encourage discipline.
Considerations
- Interest costs – Snowball Method does not prioritise debt with the highest interest rates.
- Individual preferences – some may prefer financial optimisation rather than emotional satisfaction.
- Financial circumstances – Snowball Method is suitable depending on a person’s financial circumstances, income, expenses, debt balances, and interest rates. It is important to assess these factors before settling on this debt repayment strategy.