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The Power of the Debt Snowball

In Budgeting Tips, Manage Money, Paying Off Debt by Phil McGilvrayLeave a Comment

In this age of easy credit most of us have at one point or another experienced what it is like to be in debt. Whether it is a mortgage, student loan or high interest consumer debt you will appreciate the fact that paying off your debt is always so much harder than acquiring it.

At Grandma’s Jars we are passionate about helping people free themselves from the burden of debt. We know how hard it can be to overcome debt, but we also know that with the right structure even the toughest debts can be conquered.

In this blog we will outline the three steps towards eliminating debt using the ‘Debt Snowball Strategy’, a strategy that we have been successfully using with our clients for over 15 years.


Step 1: Identify Your Debts

It might sound obvious but the first step to overcoming debt is to have a thorough understanding of what you actually owe. Start by writing down who you owe and the total balance owed. Once you have done this, add the details, such as:

  • the interest rate
  • the minimum repayment required
  • your current actual payment amount
  • how long the loan has left to run
  • if it has an interest free period, the exact date that interest free period ends

Getting the full and honest picture can be a bit painful to deal with at first but don’t be discouraged, facing up to the reality of your situation is half the battle. Once you can quantify your situation you are in a much better position to do something about it.


Step 2: Reduce All Payments to the Minimum Allowed

The most common mistake people make when attempting to pay off debts is to try and pay them all off at once. While it may help us feel as if we are making progress, paying little bits off each debt is a very ineffective and demoralising way to tackle debt.

The key to paying off your debts is to focus on just one debt at a time. To do this you need to drop the repayments on all your debts to the minimum payment required. If you have high-interest lifestyle debt like credit cards and personal loans, you might also want to consider dropping your home loan to interest only for a period of time too.

The purpose of reducing all your loan repayments to the minimum is to free up funds so that we can purposefully direct them towards one debt at a time.

Step 3: Direct All Surplus Funds to Your Smallest Debt

By reducing the repayments on all your debts to the absolute minimum you should now have surplus funds. Instead of distributing these surplus funds across a number of debts, you now need to focus all these extra funds at just one debt, your smallest debt. Any other extra funds you might have within your budget should be directed here as well.

Once your smallest debt has been paid off take the funds you would have used for that payment and apply them to the next loan on your list. Each time you pay off a debt you will have more funds available to use for the next debt. The snowball is taking shape at this point and it is only a matter of time before you use this rolling cash flow to take out all of your debt.

If you are a maths geek you may be wondering why we don’t focus on the debts with the highest interest rate first. While it makes sense mathematically, paying off your debt is much more about psychology than mathematics.

Paying off one debt provides a huge psychological boost; it builds confidence in the process and provides us with the energy we need to tackle the next debt. While each progressive debt gets bigger so does our confidence and belief in our ability to overcome it.

It bears repeating: paying off debt is not an easy task; however, the steps we have created here break down the large goal of being debt-free into smaller, attainable tasks. Focus on one debt at a time, keep a positive outlook and you will succeed.

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