List Your Debts: Make a list of all your debts, including the outstanding balances, minimum monthly payments, and interest rates. Arrange them in ascending order based on the outstanding balances, from smallest to largest.
Pay Minimum Payments: Continue making the minimum payments on all your debts to maintain good standing and avoid penalties.
Allocate Extra Money: Look for opportunities to free up extra money in your budget. This could come from cutting expenses, increasing your income, or redirecting funds from non-essential spending. Allocate this extra money towards paying off the smallest debt first.
Focus on the Smallest Debt: Put all the extra money you can afford towards paying off the smallest debt while making minimum payments on the others. Pay as much as you can until the smallest debt is completely paid off.
Celebrate the Victory: Once you’ve paid off the smallest debt, celebrate the achievement. This psychological boost can help keep you motivated to continue tackling your remaining debts.
Roll Over Payments: After paying off the smallest debt, take the money you were allocating to it (including the minimum payment) and add it to the minimum payment of the next smallest debt. This creates a larger payment amount towards the next debt.
Repeat the Process: Continue the process, focusing on the next smallest debt while making minimum payments on the others. As you pay off each debt, roll over the payments to the next one until you’ve cleared all your debts.
The debt snowball method is based on the idea that paying off smaller debts early on provides a psychological boost and momentum to tackle larger debts. While it may not be the most mathematically efficient method in terms of interest savings, the motivation gained from paying off debts incrementally can be powerful for many people.
However, it’s important to note that everyone’s financial situation is unique. If you prefer a different approach or have debts with significantly higher interest rates, you may consider alternative strategies like the debt avalanche method, which prioritizes debts with the highest interest rates first. Evaluate your circumstances and choose the method that aligns with your goals and motivates you to become debt-free.
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