How To Repay Your Debts Using The Snowball Method

Many of us find ourselves entrapped in a web of consumer debt if not the educational debt. We all need that new house, new car, or the much needed new furniture for our humble abode. As a consequence, it’s possible that we could find ourselves drowning in debt with no sight of the shore.

Don’t let the burden of being in debt dishearten you. Remember, if you got yourself into a hole, you can very well pull yourself out of it too. Just follow this process.

A Well Established Budget

The first step to being debt-free is to put a good budget system in place. It may sound a little scary at first but it is, undoubtedly, the most important step of the process. Putting a budget in place will allow you to stay ahead of your investments and expenditures or rather strike a healthy balance between the two. Create a list and write down where your money is going each month and compare it with where it should be going. Initially, you might notice a lot of discrepancies between the columns. Don’t panic. You need to spot errors if you need to fix them. Keeping a record of your expenses will allow you to free the money being spent on unnecessary pursuits. Stop avoidable spending immediately and use the money saved to create a Fixed Deposit. Eventually the extra cash which you save each month will provide additional support and help repay the debt quicker.

So, first up, get that list ready.

Create A Strategy

The next step of the process is to create a strategy. You are fighting an uphill battle so you need a fail-proof strategy. Write down all the debts that you have to pay off in a neat little (or long) list. You can choose either of the two ways to do it:

1. In an order of minimum to maximum debts (based on the amount of each).
2. In an order of highest to lowest rate of interest on the debts.

Many a times, the second option is the best way to go. Interest rates are exorbitant and are the biggest reason why people find it extremely difficult to get out of the debt trap. Often, people end up paying more in interest than they actually borrowed. Back to the topic. Paying the debt with the highest rate of interest first will save you from spending your precious monies on interest.

However, do note, that the first method is equally effective. With the first method you can get a morale boost by getting rid of your biggest debt. This includes the interest on it as well.

The methods can be selected based on the kinds of debts you are under. If a small debt has a very high rate of interest or a big debt has a low rate of interest, then you should make an informed decision based on which will be more expensive in the long run. Ascertain, which way is better suited to clearing your debts in a shorter amount of time and then go for it.

Additional Reading: Pradhan Mantri Mudra Yojana

The Compartmentalisation Method 

Calculate the minimum amount which you have to pay each month towards clearing your debt. Having formed a budget, after including all the expenditures, add the minimum amount of debt clearing money to it. Now you should be left with a little extra cash. If you are not left with cash then you must do away with some expenditure.

Next move is to take stock of the extra cash and divide it into three groups. They are:

1. Savings
2. Debt clearance money
3. ‘Me’ money

Some people may be of the opinion that you should not keep any ‘Me’ money. However, this can be ignored if you are not under heavy and serious debt. Don’t be too harsh on yourself. Clearing your debts is going to be a long fight and a little fun money will keep you motivated.

The money under the ‘debt clearance money’ is to be exclusively used for repaying debt, over and above the minimum amount due. Got the point? This money should be used to repay your debt on top of the list. Add the money to the minimum amount payable and see how much faster you clear that debt. After it is done, move to the next debt on the list. Make sure that the amount you keep aside to repay your debts does not change, even if your debts get smaller. This will ensure that you will always have some extra left after extinguishing a debt. Once your second debt has been paid off, move to the next one and so on and so forth. Getting the drift? Follow this process and soon all your debt will be repaid. What’s more, you’ll have some extra money left at the end of it. You see how this method is so effective?

The best part about this method is that it does not take into account the additional money which you may be making alongside. You can use that to pay your debts even faster or just use it to build up your savings and investments.

Additional Reading: 7 alerts for a money crunch!

Pen It Down

The next step is to write down everything and anything related to your debts. You can either maintain a notebook or you can download software designed to keep a track. You can use either of the options to create a balance sheet. It will give you an estimate of how long you will take to repay your debts, assuming to follow the procedure to the T. This will act as a table which will keep you informed about your progress and discrepancies.

Time To Celebrate!

Living under the weight of debt can dampen your spirits, especially if you have a lot of it! So motivation is the key. Don’t wait for all the debt to clear before you pop the champagne bottle. Set milestones and celebrate when you achieve them. This will keep you motivated to stick to the process until you have repaid the last penny. Once all is good, remember – the mantra is to keep paying the installments on time and throw in the extra cash towards your debts to pay them off faster. If you happen to take on new debt, try to pay it off quickly. Learn from your past mistakes and make payments on time.

We hope this article is an answer to your debt problems. If you find the article useful, do leave a comment in the comments section below. If you’ve lived with debt and found a way to beat it then do share your story with us. If a trick worked for you, it might help many others too.

Additional Reading: Drowning In Debt? What NOT To Do To Stay Afloat

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