What would you do if you were debt-free? Take a second to imagine what your life would look like. Imagine all the extra money you’d have to spend on the things that actually make you happy. You might have an extra R1 000, R5 000 or even R10 000 every month. What would you do with all that extra money?
How to get out of debt is not always as straight forward as you want it to be.
You may have other expenses to think about or unexpected expenses may arise that you can’t predict. And these extra payments may slow down your progress.
If you want to get out of debt fast, you will need a strategy. Having a strategy in place will increase your chances of sticking to a plan and becoming debt-free.
A strategy that has been proven to work is the Debt Snowball Method.
What is the Debt Snowball Method?
The Debt Snowball Method is a repayment strategy focused on paying off your smallest to largest loan amount. This strategy only takes into account the loan amount and not the interest rate of the loan.
By staying focused on the loan amounts, the strategy will change your spending behaviour. Instead of paying off all your debt accounts at once, you’ll focus on paying off one debt account at a time.
By taking this approach you’ll gain power over your debt. As soon as you’ve eliminated your first account, you’ll get the ball rolling and be debt-free in no time.
And that is the power of the debt snowball effect.
Which debt should you include?
Getting out of debt using the debt snowball method should include all your non-mortgage debt.
This may include, but not limited to, any of the following:
- Personal loans
- Payday loans
- Student loan
- Car loan
- Credit card bills
- Medical bills
How does the Debt Snowball Method Work?
How do you get out of debt using the debt snowball method?
To illustrate how the debt snowball method works we’ll use the following debt accounts as examples.
How To Get Out Of Debt – Step 1
List all your debt accounts from smallest to largest amounts.
How To Get Out Of Debt – Step 2
Make minimum repayments on all debt accounts, while throwing as much extra money as possible towards your smallest debt account.
Let’s assume you have an extra R1 000 that you can use.
In this case, you would be paying off your Store Card with a monthly repayment of R1 496.
Once that account has been paid off, transfer that repayment amount to the next repayment amount on the list.
Which would be your Credit Card debt. Now you’ll be paying R2 153 towards this account.
How To Get Out Of Debt – Step 3
Repeat this method until you’re debt-free.
You’ll notice that the repayment amounts keep increasing as you plough through your debt accounts.
By the time you reach your largest debt account, you’ve built up a financial tolerance to handle that huge debt amount.
Why is the debt snowball method so successful?
Strategies like the Debt Avalanche method focus on paying off the account with the highest interest rate. Although this is a good strategy to save money in the long run, it does take a lot longer to get rid of all your debt.
If you start your debt-free journey by paying off your biggest account, you won’t see any traction for a long time. It’s going to take months before you see progress.
Seeing progress happen quickly is important because it helps you stay focused. You don’t want to lose interest in paying off your debt and quite before you’ve even had a chance to finish.
However, this strategy works if you want to see the progress that you’re making. And it makes it more likely to the plan and succeed in your financial goals.
The most important thing to consider when paying off your debt, is to choose a strategy that you’ll stick with for a long time.
It is important that you stay motivated. This makes getting out of debt a little bit easier.
There’s no better feeling when you knock out that first debt account and roll over to the next one.
Make yourself proud
Now that you know how to get rid of debt, it’s up to you to make it a reality.
You have the power to make a difference in your financial situation. Pay off your debt and make yourself proud.
All it takes is one debt account at a time.
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