What is the Debt Snowball Method? | OkCarz

How to Reduce Debt with the Debt Snowball Method

If you are reviewing your finances and realizing that you are underwater in debt, it can feel very stressful and challenging to get yourself out of it. The Debt Snowball Method is a strategic way to reduce, and eventually, eliminate debt. Here’s how the Debt Snowball Method works.

How to Use the Debt Snowball Method

As the name suggests, the Debt Snowball Method is designed to help people get out of debt by starting small and gaining traction as time goes on. Follow these steps to use the Debt Snowball Method.

[ READ MORE: How to Reduce Credit Card Debt ]

Person knocking over a stack of wooden blocks that spell the word "debt"
  1. Gather your debts and list them from smallest to largest. Common debts include credit card, student loans, auto loans, and medical bills.
  2. Pay minimum payments on each debt on time. Doing this will ensure that you aren’t charged any late or missing payment fees and your credit doesn’t take a negative hit.
  3. With your remaining money, pay off as much as you can for the smallest debt. Let’s assume that your credit card is $1,000 in debt, your auto loan has $2,000 left to go, and your student loan still has $10,000. With the Debt Snowball Method, you will want to pay down your credit card balance first before your auto or student loans, even if one of these loans has a higher interest rate.
  4. Roll over payments from debts paid off to the next. This is where the snowball effect comes in. Money that you would’ve normally paid towards that credit card debt is now available to be put towards your auto loan. Once your auto loan is paid off, money from both your credit card debt and auto loan will now be available for your student loan. Soon, you will realize that by eliminating smaller debts, it will be much easier to pay off larger ones. Also, getting rid of that smaller debt will certainly feel good!
  5. Repeat until you are debt-free. A big part of getting out of debt is discipline. Eliminating one debt doesn’t mean you should take on another. Stay focused and stay positive about paying down your debt and eventually you won’t need to stress over it any longer.

While not all debts are planned, such as an emergency trip to the hospital or an unfortunate car accident, you can help reduce the financial strain from these sudden debts with healthy budgeting habits. Check out the popular 50/30/20 budget rule to find out if you are spending too much each month.

For more financial tips, along with everything automotive, make sure to follow the OKCarz blog. Do you need a high-quality reliable vehicle that fits your budget? Explore our current pre-owned vehicle inventory online here.

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