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Debt is money that an individual owes to a lender. Interest is usually included in debt sums. Individuals who have a number of different debts may choose to practice the debt snowball method. This is a method in which an individual begins by paying off the smallest debts first then progressively works his or her way up to the largest debt. People choose this method of debt repayment because it allows them to see their debts disappear more quickly than in other methods, allowing them to avoid feelings of being in over their heads financially.
The first step in the debt snowball method is to list all of the debts owed. The smallest debts should be listed first and the largest should be listed toward the bottom. Credit card debts, automobile loans, and general loans that may have been used for remodeling and other expenses should be included.
It is important that a debtor makes a minimum payment on each debt every month. When minimum payments are not made, penalty fees may be added to debts. Fees can defeat the effectiveness of this system. Likewise, a debtor should avoid adding to each debt, since this can alter the amount owed, thereby changing the system.
To practice the debt snowball method, an individual should determine how much extra cash he or she has each month. Extra cash is money to which a person has access and which does not go to necessities such as food, shelter, utilities, and other services. Cash should then be divided among the various debts. The greatest percentage of the smallest debt should be paid first. It is important to remember, however, that all minimum payments should be made.
For example, if the smallest debt requires minimum payments of 15 dollars per month and the largest debt requires minimum payments of 200 dollars per month, a debtor might chose to pay 115 dollars of the minimum payment of the smallest debt and the minimum payment of 200 to the largest debt. By using this method, the smallest debt is paid off very quickly and a debtor has one less bill to worry about.
In the example above, 115 dollars was used to pay the smallest debt each month. Once the smallest debt is paid off, an individual using the debt snowball method might then apply that 115 dollars to the second smallest debt. If the second smallest debt requires a debtor to pay 30 dollars each month, he or she would then make payments of 145 dollars to that debt. This sum was determined by adding the 115 payments of the debt that has been settled to the second smallest debt. Once the second smallest debt is paid off, a debtor applies extra cash to paying off the third largest debt.