Family Budget Fridays: Snowballing Debt

Family Budget Fridays: Snowballing Debt

You’re likely familiar with snowballs, but have you heard of rapidly decreasing your debt with a snowball?

No, it’s not a mix of frozen precipitation applied to financial accounts that are pulling you into the red, rather a simple, systematic way of eliminating debt a little bit at a time, until you’ve snowballed all of your debt application (money) to singular force–roll that sucker down a hill and before you know it, you can be debt free.

Regardless of culture, religion or individual interests, we can all probably agree to one thing: Debt sucks. If you’re a member of a family, you probably owe money to at least one financial institution, hospital or you may simply be behind on paying for dance or piano lessons.

Generally, when income has remained steady, debt results in a mismanagement of funds, or too many purchases with credit. On the other hand, circumstances may dictate the “necessity” to purchase with credit: Health emergencies, unexpected travel or an attempt to get food on the table after losing a job. Regardless, it’s a dangerous cycle and will inevitably leave you with one thing: Debt.

Snowballing Your Debt

The process of snowballing debt isn’t complicated. The most difficult thing about it is having to sit down and come to terms with how much you owe. If you owe to several creditors, snowballing is a wonderful method of debt reduction. Before you get started, however, it is highly recommended that you contact your creditors, let them know what your goals are, and see if they can work with you on interest and ARPs.

To begin the snowball process: Apply all extra resources to the smallest amount of debt you owe. Pay it off. Once you have paid that off, apply the former payment amount of your smallest debt, plus any extra financial resources to the next highest amount of debt you owe. Pay it off–so on and so forth. Hopefully you can visualize this snowball gaining size and momentum, allowing you to offer some serious pay-off dough to the larger amounts of debt you owe.

An example: Let’s say your GAP card is $60/month and you owe less than $1,000, a hospital bill is $239/month from a total of $6,000 and credit card debt has swollen to $299/month from a racking of $9,500. Maintain your payments on your hospital bill and credit card, and with any extra money you can pull from your budget, apply it to the GAP card. Pay it off, and don’t use it unless you have funds available to immediately pay it off.

Next, take that extra $60-plus and apply it to your $239 hospital bill. Now you’re paying $300-plus on your bill/month. Pay it off, and you’ll be paying $600-plus on your credit card bill. You can see how fast you’ll eat up that debt when applying this simple debt reduction method.

(It is worth mentioning: If a particular card or interest rate is much higher than the others, it would make the most sense to apply the snowball method to that amount first, followed by the next highest interest rate. This will save you the most money in the long run. Much of this will depend on how much you owe, and to how many different entities. You may need to bust out the calculator and crunch some numbers to find the “direction” in which you want to push your snowball.)

This is one way of reducing your debt without the reliance of a financial institution. However, when debt becomes unmanageable, it is a good idea to sit down with a representative at your bank or credit union of choice and hammer out some options. There may be an opportunity consolidate debt into one lower payment, or transfer balances to a better interest rate to help with the payoff process.

Ultimately, make the decision to own your debt, and stop letting it own you. Make debt reduction a goal, and subscribe to more financial wisdom and accountability–you can be debt free faster than you think.

(Image via: Frugal and Thriving)