Dave Ramsey, a proponent of the debt-snowball method, concedes that an analysis of math and interest leans toward paying the highest interest debt first; however, based on his experience, Ramsey states that personal finance is "20 percent head knowledge and 80 percent behavior" and that people trying to reduce debt need "quick wins" (i.e., paying off the smallest debt) in order to remain motivated toward debt reduction.
The debt snowball method is a debt reduction strategy where you pay off debt in order of smallest to largest, gaining momentum as you knock out each balance. When the smallest debt is paid in full, you roll the money you were paying on that debt into the next smallest balance.
It looks something like this:
Step 1: List your debts from smallest to largest regardless of interest rate. Step 2: Make minimum payments on all your debts except the smallest. Step 3: Pay as much as possible on your smallest debt. Step 4: Repeat until each debt is paid in full.
An Example of the Debt Snowball Say you have four debts: 5,000aed credit card—400aed payment 13,000aed credit card—950aed payment 20,000aed loan—400aed payment 100,000aed loan—2700aed payment
Using the debt snowball method, you would make minimum payments on everything except the 5000aed credit card. But let’s say you have an extra 500aed each month because you cut your expenses down to the bare minimum.
Since you’re paying 900aed a month on the credit card (the 400aed payment plus the extra 500aed), that debt will be gone in 6-7 months. Then, you can take the freed-up 900aed and attack the 13,000aed credit card debt, paying a total of 1,850aed (900aed plus the 950aed minimum payment). In about 4-5 months, you’ll wave goodbye to that credit card. You’ve paid it off!
Now, attack that 20,000aed loan in the tune of 2,250aed a month. In 7-8 months, it’ll drive off into the sunset. Now you’re on fire! By the time you reach the 100,000aed loan—which is your biggest debt—you can put 4,950aed a month toward it. That means it will only last about 11 months. Thanks to your hard work and sacrifice, you have paid off 138,000aed of debt in only 28-31 months using the debt snowball method! You’re now debt-free!
Why Does the Debt Snowball Method Work?
The debt snowball works because it’s all about behavior modification, not math. When it all boils down, hope has more to do with this equation than math ever will. If you start paying on the 100,000aed loan first because it’s the largest debt, you won’t get rid of it for a while. You’ll see numbers going down on the balance, but pretty soon you’ll lose steam and stop paying extra. Why? Because it’s taking forever to get a win! And you’ll still have all your other small, annoying debts hanging around too.
But when you ditch the smallest debt first, you see progress—quickly! You have hope! That debt is out of your life forever. The second debt will soon follow and then the next. When you see the plan working, you’re more likely to feel like you can stick it out. And when you keep at it, you’ll succeed in becoming debt-free! By the time you’re paying on the bigger debts, you have so much cash freed up from paying off the earlier ones that it creates a debt snowball. Suddenly, you’re putting hundreds of dirhams a month toward your debts instead of slowly chipping away at them with minimum payments. You build momentum, and that changes your behavior and helps you get out of debt for good. It’s like Dave says: “The problem with your money is not your math. It’s the person in the mirror.” That’s right. Winning with money is 80% behavior and only 20% head knowledge. If you can get that person to change their habits, there’s no stopping you!
Chart Your Progress
To keep up your energy and motivation, sometimes you just need to see how quickly you could become debt-free.
Me and my husband applied the same strategy to tackle our debt. After our marriage, we focused on attacking the 1st type of debt with the smallest amount and carried over the freed up amount to the next one (left). Each box represents one month. The boxes at the center and right side are for small automatic savings and payment for Social Security fund by the Philippine Government. So, by the time that we are debt free, we will also have some small savings saved up.
I fill the box with color once the payment for that month is done. As you can see, we are almost half way through and we are so motivated to turn things around by the grace of God.
We always thank God every time a milestone is achieved. I believe He has a bigger purpose why we went through a financial problem at this young age. Atleast, we know how to value our time and money and we should not get pleasure from buying material things. Instead, we should be thankful of simple things and spend our time that is good in the eyes of the Lord.
Godbless to everyone. I hope you are all inspired and motivated, please don't hesitate to message me if you need any help with your debt issues. I will be glad to help. 😊