What is the Snowball Technique? Is Paying Debt Using the Snowball Technique Effective?
The snowball technique is a method to settle debts starting from the smallest debt amount to the largest debt amount. This strategy is effective for you if you have high discipline and want to pay off all debts in a short time.
To pay your debts using the snowball technique, here are the steps to take:
- List down total debts and arrange them from smallest to largest amount.
- Determine how much maximum amount you’re willing to take from your salary to pay all your debts.
- Calculate how much money you can add together with monthly installments for the smallest value debt.
- When you’ve paid off the smallest debt, add that smallest debt payment amount together with the minimum payment for the second debt.
- Pay off the second debt completely.
- Repeat this step until you successfully settle all debts.
Guide & Example of Debt Settlement Using the Snowball Technique:
For example, Aidil has 3 types of bad debt he wants to settle quickly. Here are Mr. Aidil’s debts (arranged from smallest to largest amount):
Visa credit card – balance RM 1000 – minimum RM 50 monthly
Personal loan – balance RM 10,000 – minimum RM300 monthly
Car loan – RM 15,000 – minimum RM 600 monthly
Aidil has extra money of RM 500 monthly to pay back existing debts.
Step 1: Pay & Settle Credit Card Debt
Pay Debts As Usual. However For Debt with Smallest Installment (Credit Card), Make Extra Payment Using Available Extra Money (RM 500).
Total Credit Card Installment Payment At This Time Is RM 550 monthly.
Credit card – balance RM 1000 – minimum RM 50 monthly + RM 500 Extra money
Personal loan – balance RM 10,000 – minimum RM300 monthly
Car loan – RM 15,000 – minimum RM 600 monthly
In 3 Months, Credit Card Debt Has Been Paid Off. New Debt Balance Is;
Personal loan – balance RM 9,400 – minimum RM300 monthly
Car loan – RM 13,800 – minimum RM 600 monthly
Step 2: Pay & Settle Personal Loan
Pay Debts As Usual. However For Debt with Smallest Installment (Personal Loan), Aidil Uses The Amount Used To Pay Credit Card Debt (RM 550) Plus The Minimum Personal Loan Payment (RM 300) To Pay Personal Loan Balance.
Total Personal Loan Installment Payment At This Time Is RM 850 monthly.
Personal loan – balance RM 9,400 – minimum RM300 monthly + RM 550 extra money
Car loan – RM 13,800 – minimum RM 600 monthly
Final Step: Settle Car Loan
In 11 Months, Personal Loan Will Be Settled And Only Car Loan Remains With Balance RM 7200.
At This Time, Aidil Will Use The Amount Used To Pay Personal Loan Of RM 850 monthly Plus The Car Minimum Payment Of RM 600 Monthly To Pay Car Loan Installment.
Total Personal Loan Installment Payment At This Time Is RM 1450 monthly.
Car loan – RM 7,200 – minimum RM 600 monthly + RM 850
Debt settled after 5 months.
In Conclusion, Aidil Has Settled All Debts In 18 Months And He Can Reorganize His Financial Strategy. Interesting Right, The Snowball Technique?
