So many people in Australia are personally in debt because of poorly disciplined spending. This out of control consumption gives not only instant gratification, but also long-term financial headaches. Credit cards reach their limits, balance transfer offers dry up, and the trail of “free” money eventually ends.
To dig out of the financial mine before it collapses, your best option is to start using the debt snowball repayment plan. Read on to discover what a debt snowball is, who uses it and when, how it works, and how you can follow a step-by-step guide to benefit from your own debt snowball.
What is a Debt Snowball?
Imagine a small snowball rolling down a steep ski slope. As the snowball rolls, it gathers additional snow and becomes larger. As the snowball enlarges, it gains momentum, rolls faster and gathers even more snow, which makes it roll even faster. By the time this new snow boulder reaches the last few feet of the slope, it is impossible to stop.
Just like the real snowball, a debt snowball uses the power of focus and momentum to knock down debt obstacles. Borrowers attack one debt at a time, pay it off, and move on to the next. Simply defined, the debt snowball repayment plan is a systematic way of paying off multiple debts while feeling good about the accomplishment.
Who Can Use This Debt Repayment Method?
The debt snowball method is valuable to anyone owing money on multiple credit cards and loans. The method is targeted toward individuals who can afford at least the minimum payments on all debts and works especially well for anyone with extra money left over.
When is a Debt Snowball Repayment Plan Beneficial?
The main advantage of the debt snowball repayment plan is that it can always be used with two or more debts. It is a simple plan that does not require any complicated equipment or accountant fees to get a person out of debt. The debt snowball is especially helpful for large debts because it demonstrates progress where most people only see an insurmountable financial burden. Keep in mind that the debt snowball method is typically not used for home mortgage debt and debts larger than one-half of a person’s net salary (disposable income), although the method can be applied successfully to these debts.
How Does This Method Quickly Eliminate Debt?
Because the debt snowball method eliminates small debts first, it gives borrowers a sense of accomplishment. As with weight loss, these rapid, positive results provide the motivation necessary to continue with the plan. In addition, the positive feedback from paying off several small debts gives borrowers the strength to tackle the larger, long-term debts.
How Do I Set Up My Own Debt Snowball?
Follow the steps below to create a successful debt elimination plan. Keep in mind that this process only works when extra payments reduce principal balances instead of going to the next month’s payment. Before beginning the debt snowball plan, contact lenders and request that all extra payments be applied to principal.
- Set aside $1000 as an emergency fund. You will be applying your extra cash to your debt, so the emergency fund will provide a buffer if needed.
- On a piece of paper or spreadsheet, list all debts, their balances, and their minimum payments. This information can be pulled from the most recent statements. Include credit cards, personal loans, student loans, auto loans, and medical bills.
- Sort the list from the smallest balance to the largest balance. Debt 1 is the smallest, Debt 2 is a bit larger, Debt 3 is larger, etc. If two debts have the same balance, rank the debt with the higher interest rate first.
- Total the minimum required payments and decide how much extra can be paid on top of that total. The “Extra Money” amount may be zero, but increasing the Extra Money means paying off debts quicker.
- Pay the minimum payment on all debts, plus add all of the Extra Money to the Debt 1 payment.
- Continue this payment plan until Debt 1 is paid in full.
- After Debt 1 is paid off, the Debt 2 payment will become the Debt 2 minimum plus the old Debt 1 minimum plus the Extra Money.
- Continue this payment plan until Debt 2 is paid in full.
- After Debt 2 is paid off, the Debt 3 payment will become the Debt 3 minimum plus the Debt 2 minimum plus the Debt 1 minimum plus the Extra Money.
- Repeat this process until all debts are paid off.
- Celebrate!
No matter how large or small your loan balances, a debt snowball repayment plan can help you overcome your debt burden. Follow this simple method, make a difference with your payments, and celebrate the beginning of your new financial future.
Get Your Snowball Rolling with a Balance Transfer Card
| Credit Card Offer | Purchase Rate (p.a.) | Balance Transfer (p.a.) | Annual Fee | Apply now | ||
|---|---|---|---|---|---|---|
| rate | period | |||||
|
HSBC Credit Card No annual fee. 0% on balance transfers for 8 months. Access to offers, discounts and benefits. |
17.99% | 0% | 8 months | $0 |
Featured Card |
|
ANZ Platinum Credit Card Platinum rewards. 0% balance transfers & purchases for 6 months. Apply before 12 June 2012 |
0% | 0% | 6 months | $0 |
Editor’s Choice |
|
Citibank Clear Platinum Credit Card 0% for 6 months on balance transfers. Platinum rewards. 1/2 price annual fee 1st year. |
0% | 0% | 6 months | $49 |
Editor’s Choice |
Image: redjar
David is Co-Founder of 
David Boyd
Andrew Boyd
St.George Vertigo MasterCard
ANZ First Visa Credit Card
Westpac Low Rate Credit Card