Debt Snowball Strategy

The debt snowball strategy is a strategy whereby a person lists all the debts they have from smallest to largest (this does not include the mortgage) then allocates any extra money to paying off the smallest debt first while still ensuring to make the minimum repayments to any other debts.

When it comes to paying off debt there a many different strategies that you can use to make this happen.

This is a great motivational way of paying off debts in your debt free journey.

What is the Debt Snowball Strategy

This strategy for paying off the smallest debts first then moving onto the next smallest on the list means interest rates are not a factor when paying off debts using this strategy.

Unlike the avalanche strategy which would cost debtors less in the long run by paying off the highest rate interest first, the snowball strategy is more effective in reality due to human psychology, whereby we consider it a “win” each time a debt is paid in full.

Typically, the snowball strategy is used for credit cards, although it can be used to pay off student loans, personal loans etc.

Tip: having a realistic spending plan whereby you include your debt repayments will help to prevent you from overspending on credit.

What are the Pros and Cons?

There are disadvantages and advantages to the snowball strategy, and each of the pros and cons should be considered carefully prior to your debt free journey, to make sure you have the best method to suit your situation.

Pros of the snowball strategy are motivation: paying off debts can seem more manageable if the list is whittled down quickly by paying off the debts from smallest to largest.

Implementation is another pro for this method, as id doesn’t require you to know the interest rate you just have to simply know the balance outstanding.

On the other hand, Cons of the snowball strategy include interest, for instance while you are paying off a debt in order of smallest to largest, interest is still being charged on the debts and you will end up paying more over time.

Time again is a factor as it will mean you will end up taking longer to pay off your debts.

Tip: consolidation or refinancing at a lower interest rate can help you to pay debts of faster with the snowball strategy
Debt snowball vs. debt avalanche is a powerful argument.

The method of using the snowball strategy is based more on a psychological point of view than financial, assuming that the gratification received from paying your debts off from a list helps to keep you motivated in paying off debt for good and this may be true form a large number of people.

However, for many people paying of the highest interest rat first using the avalanche strategy means the reduction of the total debt will be faster.

This is due to your highest interest debts accumulation of interest while you are only paying the minimum repayment due on them.

Choosing the best option for your debt free journey is a very personal option, take into consideration all of the information and find what works best for you.

Contact your financial institute to discuss consolidation, seek advice from a free financial counselling service, most importantly make a spending plan (budget) in order to reach your goals without adding more debt or stress to your situation.