How to apply the Debt Snowball Method?

When you're struggling with multiple debts, it can be overwhelming and difficult to know where to start. One effective strategy for prioritizing your debts is to use the snowball method. Here's how it works:

1. Make a list of your debts

Start by making a list of all your debts, including the creditor, interest rate, and minimum monthly payment for each one. This will give you a clear picture of your financial situation and help you determine a plan for paying off your debts.

Let’s say for this example we have the following debts:

• Credit card 1: $5,000 at 20% interest, minimum payment of $100
• Credit card 2: $3,000 at 15% interest, minimum payment of $75
• Student loan: $10,000 at 5% interest, minimum payment of $200
• Personal loan: $7,000 at 10% interest, minimum payment of $100

2. Prioritize your debts

Next, prioritize your debts by interest rate, with the highest interest rate debts at the top of the list. This is important because high interest rate debts will cost you more in the long run, so it's generally a good idea to pay these off first.

We should then have this order of prioritization:

• Credit card 1: $5,000 at 20% interest, minimum payment of $100
• Credit card 2: $3,000 at 15% interest, minimum payment of $75
• Personal loan: $7,000 at 10% interest, minimum payment of $100
• Student loan: $10,000 at 5% interest, minimum payment of $200

3. Make the minimum payments on all your debts

While you're focusing on paying off one debt, it's important to make the minimum payments on all your other debts to avoid late fees and damaging your credit score.

That leads us to:

• Credit card 1: $100
• Credit card 2: $75
• Personal loan: $100
• Student loan: $200

Total minimum payments: $475

4. Pay extra on your smallest debt

Once you've made the minimum payments on all your debts, focus on paying off your smallest debt first. This is where the snowball method comes in. By paying off your smallest debt first, you'll be able to see progress and build momentum, which can help motivate you to continue paying off your debts.

In this example, we'll focus on paying off credit card 2 first. In addition to the $75 minimum payment, we'll also pay an extra $100 towards the balance:

• Credit card 1: $100
• Credit card 2: $175
• Personal loan: $100
• Student loan: $200

Total payments: $575

5. Repeat the process

Once you've paid off your smallest debt, move on to the next one on your list. Continue making the minimum payments on all your other debts and paying extra on your next smallest debt until all your debts are paid off.

Once credit card 2 is paid off, we'll move on to credit card 1. In addition to the $100 minimum payment, we'll also pay an extra $175 towards the balance:

• Credit card 1: $275
• Personal loan: $100
• Student loan: $200

Total payments: $575

By following this strategy, you'll be able to tackle your debts one at a time, starting with the smallest and working your way up. This can help you stay motivated and focused as you work towards becoming debt-free. Just be sure to stay committed to your plan and make any necessary adjustments along the way to ensure you're on track to meet your financial goals.