How do I get my debt under control?
Has that thought crossed your mind lately?
Whether you’ve got a car loan, student debt, or credit card loans, having a monthly obligation can often feel stifling.
If you want to get out of debt, this snowball method might work for you. It’s a plan where you pay off your debts from smallest to largest, regardless of interest rate. It may sound more logical to pay off your highest interest rate loans first, but here’s why the snowball method is massively effective.
The snowball method is good for those who are inspired by small wins. It’s proven effective, according to a Northwestern study.
Marketing professors David Gal and Blakeley B. McShane studied 6,000 people who finally erased their debt. Gal and McShane found that closing debt accounts, seen as small wins, provided a perception of progress toward total debt elimination. This progress was motivational and increased goal persistence for those who eventually became debt free.
It’s much like having a punch card to your favorite coffee shop, where you might receive a free tenth drink after paying for nine. Your free reward (the ultimate goal) seems so far away after only buying one espresso. The goal seems a little closer after your fifth latte, and even more so after the seventh. You’re probably more motivated and determined to visit your local coffee shop after your eight and ninth espresso in order to gain your free tenth drink.
How to Get Out of Debt: Practical Tips
According to NerdWallet, a personal finance web site, before you embark on the snowball strategy, you’ll need to:
Add up how much you owe, other than a mortgage. Then compare your monthly expenses (we suggest including savings in that) to your monthly income and make a budget. Hopefully, there’s some money left over. That’s the money you’ll use to eliminate debt.
What Is a Debt Snowball?, NerdWallet
You’ll still be paying the minimum on all your balances, except for the smallest debt obligation. That’s where your extra leftover money will go. Once you pay off the smallest debt, you’ll roll that minimum payment (plus extra leftover money) into the next obligation, and repeat for your other loans, until you’re debt free.
There’s a free debt snowball calculator by undebt.it here, if you’d like to see how it works.
Have you had any success with getting out of debt? What’s worked for you? Leave a comment below.