Managing multiple debts can feel like a never-ending burden, and it’s tempting to ignore the problem, hoping it resolves itself. However, this “strategy” seldom works, and normally exacerbates the problem.
What you should be doing is tackling the debts head on – like a bull charging a matador, only you won’t miss!
By paying off your debts, you are essentially buying back your future cash flow. You will regain your financial confidence and can start allocating money to wealth building activities rather than the shackles of debt.
By paying off your debts, you’re essentially buying back your future cash flow. This newfound financial freedom allows you to focus on wealth-building activities instead of being tied down by the shackles of debt. One of the most effective strategies to achieve this is the Debt Snowball, and we’ve even built a free Debt Snowball Calculator to guide you.
What is the Debt Snowball Strategy?
The traditional debt snowball strategy is a structured method of repaying debt that prioritises smaller debts first to build momentum. In this method:
- List all debts from smallest to largest balance, regardless of interest rates.
- Make minimum payments on all debts except the smallest.
- Direct extra cash flow to pay off the smallest debt as quickly as possible.
When the smallest debt is paid off, redirect the freed-up repayment amount toward the next smallest debt, creating a “snowball” effect. Each subsequent debt receives increasingly larger payments, accelerating the repayment process.
The Motivational Power of Small Wins
The primary benefit of a traditional debt snowball is that it keeps you focused and motivated. By zeroing in on the smallest debt first, you get a quick win. That win then compounds into the next smallest debt and so on.
It’s like playing dominos but with a greater level of satisfaction when one falls!
Shouldn’t You Focus on High-Interest Debt First?
Building a financial plan is not always a maths equation. Building wealth is part art and part science. The best financial plan is the one that you will implement and stick with.
From a purely mathematical perspective, targeting the debt with the highest interest rate (the Debt Avalanche method) saves more money in the long run. However, personal finance isn’t just about numbers—it’s about behavior.
The Debt Snowball’s small victories trigger motivation and discipline, making it more likely that you’ll stick to your plan. If the excitement of progress keeps you on track, the trade-off of slightly higher interest costs may be worth it.
Debt Snowball calculator
To make this journey easier, we’ve built a Debt Snowball Calculator, free for you to use. Simply input your debts (up to 10), set repayment priorities, and watch your snowball gain momentum. The calculator shows how much time and interest you’ll save, empowering you to stay committed to your plan.
Benefits of the Debt Snowball strategy
Here’s why the Debt Snowball strategy is so effective:
- Quicker Debt Elimination: Redirecting freed-up funds accelerates debt repayment.
- Improved Cash Flow: Once debts are cleared, cash flow previously allocated to repayments can be used for wealth-building activities.
- Motivation Boost: The psychological benefits of seeing debts paid off build momentum.
- Tax-Free Return: Paying off debt is like earning a guaranteed return equal to the loan’s interest rate, without the tax burden.
Considerations Before Implementing
While the debt snowball strategy is effective, keep these factors in mind:
- Opportunity Cost: Paying off debt is important, but could the funds be better used for investing or other goals?
- Fees and Restrictions: Early repayment may incur break fees or penalties. Review your loan terms before proceeding.
- Underlying Habits: Debt repayment addresses the symptom, not the cause. Adjust spending habits to avoid future reliance on debt.
The Guided Investor approach
At Guided Investor, we use a tailored approach to debt repayment. While the Debt Snowball provides a great foundation, we also consider factors like interest rates, loan purpose, and your overall financial strategy when prioritising repayments.
For maximum effectiveness, pair the Debt Snowball strategy with budgeting. A well-managed budget ensures your “snowball” is as large as possible. Additionally, consider combining this strategy with a Lump Sum Debt Repayment to further accelerate your progress and minimise interest.
If you have multiple consumer debts, these need to be cleared—fast. At Guided Investor, we address this in Phase 1 of Wealth Creation, and the Debt Snowball is a powerful tool to help you achieve this goal.
