The Snowball Effect of Debt Repayment

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man with large debt

man with large debtYou earned your degree, bought a new car, and went through a rough patch financially. Suddenly, you find yourself suffocating under a mountain of debt. According to recent reports, this scenario is becoming more commonplace as we value new, better and bigger things. But the snowball effect can help you pay off your debt quicker than you ever imagined. All it takes is a little time, planning and concentrated effort.

What is the Snowball Effect?

What’s the best way to make a snowball? Start with a small ball of snow, and roll it through the yard. As you continue rolling, the snowball gets larger and larger until suddenly, it becomes a boulder. This is exactly how the snowball effect works when paying off debt. The goal is to tackle your smallest amount of debt, and continue rolling the extra money into your larger debts. Don’t worry about interest rates. Just focus on the debt amount.

Here’s how it works:

  • Continue making the minimum payments on all your debts, minus the smallest one.
  • Tackle the smallest debt with everything you have.
  • Once that debt is paid off, take use money you were paying towards that debt, and roll it into your next smallest debt.
  • Continue this cycle until you’ve paid off all your debt.

To make this work, there are a few things you’ll need to do.

  1. Make a list of all your debts. Order them from smallest to largest.
  2. Cut back and live simply until your debts are paid off. Remember, you want to avoid adding more debt to your plate. Otherwise, you’ll be stuck in the same vicious cycle.
  3. Consider taking on another job or finding additional side work to help repay your debts.

Why the Snowball Effect Works

Some money experts recommend tackling debts with the highest interest rate or the largest debt first. But what happens with this method is you don’t see any progress; you don’t get that immediate satisfaction you crave.

If you were to tackle your largest debt first, you wouldn’t see progress for quite some time. After a while, you’ll lose steam and enthusiasm, and stop paying extra. But you’ll still have all your debts laying around.

When you start with your smallest debt, you’ll find that you’re able to pay it off relatively quickly. And once that’s paid off, you see progress. You get that much-needed satisfaction. The snowball effect works as a behavior modification tool, helping you reach smaller goals quickly.

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