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The “Snowball Method” To Manage Debt And Free Up Funds

couple discussing how to finance a new car

Whether you are dealing with the financial impacts of Covid-19 epidemic or not, now is a great time to review your budget, savings plan, and debt management. You should develop a strategy for creating an emergency savings for future unknown circumstances like we are facing today. But now that we are in the situation, you may be facing the challenge of what debt to pay now or first.

You should always start with discussing your options with your lender first. Be proactive and try to make mutual agreed upon payment arrangements. Don’t wait until you are too far behind.

As you work to pay off debt, one strategy to start with is the “snowball method.” As the name implies, this strategy is like building a snowball, where the ball gets larger and larger as you roll it through the snow. You start with the smallest amount of debt, paying that off first, and working your way to paying off the next, then the next, up to your largest debt obligation.

This works best if you have multiple loans or credit cards with outstanding balances.

Here’s how the debt-snowball method works:

1) Write it all down:

Begin by listing out all your outstanding balances – card or loan name, current balance, and minimum monthly payment. Don’t include mortgage payments as this is for shorter-term debt obligations. This entire process may work best if you use a spreadsheet like Excel, as you’ll see in the nest step.

2) Sort Debt:

Next, arrange your outstanding balances from smallest to largest. You’ll want to start with the smallest balance and progressively work your way up to the larger balances.

3) Analyze Your Budget:

Review your monthly budget to identify any additional money you can to put towards making payments. Hopefully you have one established. If not, no worries. This is a great opportunity to develop a budget and set a plan to manage your money.

4) Making Payments:

Begin making your payments being sure to make the minimum monthly payment on all loans except the one you identified as the smallest balance. Based on your budget review, put as much as you can towards the payment on this loan. Continue this process month-to-month tracking the changing balances of all your debt obligations. Even if you are paying off debt that has a lower interest rate, continue making maximum payments to the smallest loan balance.

5) Track Payoffs & Continue The Process:

As your smallest debt balance is paid off, take the entire amount you were paying toward it (monthly minimum, plus any extra money) and target the next-smallest debt. As you pay off each debt, divert all the freed-up money toward the next debt in line.

 

By tackling the smallest amount first under this method, it’s easier to see results while staying motivated and on track. Plus, you can payoff debt faster, freeing up credit and making funds available to payoff other debt obligations.

It’s natural to feel anxious and concerned about debt, whether in a time of economic uncertainty or not. But having a plan in place will keep you on track, provide guidance, and help ease your concerns. Take a proactive approach and start lowering your overhanging debt while adding flexibility to your budget.

If you need help, we’re here for you. You can check out our free financial wellness resources which include our free online education system – KOFE, guidance from a free financial coach, online seminars and resources, and more.