The average American household in 2016 had $137,063 in debt; however, the median household income is just $59,039. That’s quite the gap to overcome for the average American. It’s easy to get overwhelmed by interest rates alone.
There has to be a way to keep from being buried under the weight of these bills, right? Well, financial experts and life coaches have honed in on a way to relieve the mental burden that leads to defaulting and taking decades to pay off debt.
It’s called the snowball method and it has seen great success, thanks in part by a little psychology and smart money management.
What is The Snowball Method?
Also known as the “debt snowball”, this is a strategy that was conceived to help those who can only make the minimum payments on their debt. When you’re only doing minimum payments, it’s easy to get overwhelmed or discouraged. The snowball method targets the smallest debts and gets them out of the way.
As you’re paying off these smaller debts in full, you build momentum into the larger debts, paying them off faster than anticipated. Basically, you take your maximum budget for your bills, then pay the minimum on all debts except your smallest.
Once your smallest debt is finished, you move to the next highest, and so on.
Momentum is Motivation
The concept of the debt snowball is pretty simple, yet so many people are drowning in debt. It’s hard to stay afloat when so much of your paycheck is tied up with minimum payments. When you feel like you’re running in place, even the smallest of milestones feel like victories.
And don’t let the dollar amount of debt paid off discourage you. Just because the first account you pay off is only a few hundred dollars, that $20/month adds up quickly. You get more breathing room and, subsequently, feel a lot better about paying everything off.
Those who focus purely on lowering the interest can lose sight of their goals. Snowballing won’t save you the most on interest, but it will restore your sanity. Common debt advice tells you to pay off the bills with the highest interest rates, but that’s where insanity can set in.
Seeing the same bills come in for years, it gets tougher to remain disciplined.
Feeling in Control of Your Debt
Once you start to narrow down your debt to just a couple accounts, then you can start thinking clearer. You can keep track of bill payments and realistically measure how long it will take to pay them off. From there, you can start to downsize your life under your own terms.
Reducing your expenses is a lot easier when you are bound to only two or three minimum payments. Your total debt might not be much different, but lowering your immediate obligations will make a huge difference.
The more breathing room you have between your minimum payments and your disposable income, the easier it becomes. Eventually, you could get your expenses down to the point where you can actually save money for emergencies and still pay off your debt faster.
Rolling the Snowball Forward
These financial habits that you build while incorporating the snowball method don’t just go away when your debt is paid off. You’ll want to keep that momentum going and start building on your financial freedom.
Prioritizing purchases is how you stay out of debt, it’s the same principle that is applied to debt snowballing. Home upgrades, holiday gifts, and other expenditures that fall outside of necessities can be tackled with the snowball effect. Pay off one thing at a time and avoid major disruptions in your cash flow.
Get It in Writing
You can’t achieve a debt-free life if you don’t commit fully to your plan. Saying you’re going to do something is one thing, so start drawing out a financial contract. List all your debts, from smallest to largest, and map out your journey.
This little checklist will become the source of your power, so to speak. You will stare your debt in the face and begin eliminating it piece-by-piece. Once you start adding to your total budget from each victory, your road gets shorter and shorter.
Once you get to that last account, whether it’s $20k in student loans or medical bills, the finish line will be in plain view. Try to stick to debit cards while you’re in this vulnerable stage to avoid reintroducing more “snow” to your path to liberation.
Why This Method is the Most Successful
It’s important to understand that most of us aren’t very good at math. It might sound like a running joke, but if the average person was good at math, they wouldn’t be in debt in the first place.
It’s OK to admit this because life isn’t just some sequence of ones and zeroes. The snowball method works better in real life than it does on paper because of how our reward-based brains are set up. When we get a victory or take a step closer to our goals, we are rewarded with those “feel good” chemicals.
If you’re just looking at your bills, watching the total debt figures go down, it’s harder to stay motivated. You know you’re doing the right thing, but the fact that you’re still losing the same amount from your check every month is hard to swallow.
More Help with Debt Relief
If most of your debts fall outside the major student loans and mortgage payments, then you can really get the snowball rolling. A lot of people don’t realize just how much of their debt can be erased or consolidated to lower their payments. The snowball method is great for taking care of the smaller debts, but make sure you have exhausted all your options first.
Filing for debt relief and bankruptcy are two major tenants in managing debt. Read our guide on these methods to learn about these strategies and if you stand to benefit from utilizing them first.