Debt Snowball Method: How It Works?

Debt repayment is one of the most difficult financial decisions to make every month after your salary gets credited to your account. The snowball method brings about consistency in the form of a repayment habit. Even though you start with the minimum amount, such a habit, once inculcated, can drive you to pay any amount of debt.

Dave Ramsey, a personal finance expert, popularised the debt snowball method emphasises on beginning your repayment (excluding mortgages) first with the smallest debts and then eventually moving on to the others.Here, you tend to build up the momentum of paying debts which helps you manage your finances in a better way. However, before getting into this repayment mechanism, it is important to understand how this process works.

Step 1: At the inception, you need to enlist all your debts in ascending order in terms of amount.Step 2: Thereafter, divide your monthly repayment sum in such a way that each balance gets a minimum amount, but the smallest one gets the largest share.Step 3: Once you have completed the repayment of the smallest sum, you can then put your largest sum left after distributing it among each balance, into the next smallest sum.Step 4: Repeat the process after you exhaust each balance in ascending order until you are debt-free.

Advantages: Having this method as your repayment process can boost you psychologically because when you find your balances decreasing day-by-day, your motivation to keep paying off debts persists. In this case, it is not the amount but the debts disappearing drives a sense of accomplishment, thereby increasing your confidence.Another advantage is the ability to manage your overall finances in a more efficient manner so that you remain stress-free. As the snowball method is completely organised, the repaying of debt balances eliminates all your worries regarding the fund allocation.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.