The snowball method: the secret to paying off debt sooner

When you borrow money, whether it’s making purchases using your credit card or taking out a loan to pay for your car or home, you’ll have to pay back the amount you borrow with interest. Borrowing money certainly has its place and paying off some of the debt can help you focus on your other financial goals such as saving for retirement.

What is the debt snowball method?

The snowball method is a strategy for reducing or eliminating debt by paying off your smallest loan first, then moving on to your next smallest loan. Over time, you’ll gain momentum as each loan is paid off, just like a small snowball that adds to its size by collecting more snow as it rolls forward.

How does it work?

The snowball method works by focusing all your attention on your smallest debt. Unlike other debt payment strategies, the snowball method is only concerned with the size of your loan balance, not the interest rate. For example, let’s say you have 3 loans: a mortgage with  750,000 remaining at 5% interest, a school fees loan of  50,000 at a 10% interest rate, and an  30,000 car loan at a 4% interest rate. The snowball method says you should pay off the smallest debt (the car loan) first, even though it has the lowest (i.e., best) interest rate.

The next step in the snowball method would be to take that same amount you just paid for your smallest loan (the car loan) and apply it to the next smallest loan (the school fees loan). Let’s break this down:

The snowball method

For Example

Step 1: Pay off the smallest debt – your car loan – as quickly as possible.

Step 2: Once the car loan is paid off, move on to the next smallest debt, your school loan.

Step 3: Take the minimum payment of  552 that you previously used to put toward the car loan and add it into the minimum payment for the student loan of  661, for a monthly payment of  1,213.

Step 4: Then, once you’ve paid off the school fees loan, repeat this process of adding the minimum payments from that loan ( 1,213) to the mortgage loan to help pay off that debt sooner.

Benefits of the debt snowball method

The most obvious benefit to the debt snowball method is that it can help you pay off debt faster. Another advantage of the snowball method is the momentum it generates for you as you pay down your debt. Other ways of reducing debt might leave you feeling discouraged, but since the snowball method starts with paying off the smallest, most manageable debt, it motivates you to keep pushing by showing you that freedom from debt is well within your reach.

Disclaimer

The views shared in this podcast are for general information and educational purposes only and do not constitute financial, investment, legal or tax advice. Listeners should seek independent advice from a qualified professional before making any financial decisions. Emirates NBD Bank PJSC accepts no liability for any loss arising from reliance on the content discussed.

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