The debt snowball method involves paying off the smallest debts first, then progressively working up to the largest debt, using extra cash each month. It is important to make minimum payments on all debts and avoid adding to them.
Debt is money that an individual owes to a lender. Interest is generally included in amounts of debt. People who have several different debts may choose to practice the debt snowball method. This is a method in which an individual starts by paying off the smallest debts first and then progressively works up to the largest debt. People choose this method of debt settlement because it allows them to see their debts disappear more quickly than other methods, allowing them to avoid the feeling of being in over their heads financially.
The first step in the debt snowball method is to list all debts. The smallest debts should appear first and the largest should appear last. Credit card debt, auto loans, and general loans that may have been used for remodeling and other expenses should be included.
It is important that a debtor make a minimum payment on each debt each month. When minimum payments are not made, penalties can be added to debts. Fees can defeat the effectiveness of this system. Similarly, a debtor should avoid adding to each debt, as this can alter the amount owed, thus changing the system.
To practice the debt snowball method, an individual must determine how much extra cash they have each month. Extra money is money that a person has access to that does not go toward necessities such as food, housing, utilities, and other services. The cash must be divided among the different debts. The largest percentage of the smallest debt must be paid off first. However, it is important to remember that all minimum payments must be made.
For example, if the smaller debt requires minimum payments of $15 per month and the larger debt requires minimum payments of $200 per month, a debtor might choose to pay $115 of the minimum payment on the smaller debt and the minimum payment from 200 to the highest 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 was used to pay off the smallest debt each month. Once the smallest debt is paid off, a person using the debt snowball method can apply that $115 to the second smallest debt. If the second smallest debt requires a debtor to pay $30 each month, then he or she would pay $145 on that debt. This amount was determined by adding the 115 payments of the debt that has been paid off to the second smallest debt. Once the second smallest debt is paid, a debtor applies additional cash to pay off the third largest debt.
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