A Good Method to Pay Off Debt

If you are struggling under debt, you might be wondering how do I ever get out of this?  I understand that it can feel insurmountable and that’s why I like the snowball method of paying off debt which can give you a much-needed win right in the beginning.  This might not be the most economically savvy approach, but sometimes in financial planning, the psychology around money is more important than saving a few dollars.

So, what is this method and why is it beneficial?

The snowball method of paying off debt is a process where you pay down your smallest balance debt first, regardless of interest rate.  Then put the freed-up cash that you were spending on the first loan payment towards paying off the next smallest loan, and so forth.  As each loan is paid off, these freed-up payments accumulate into a larger chunk of money going towards the next bill; snowball effect.  This method is beneficial because it lets you realize progress right away, and that feeling of accomplishment will help you stick to the plan.

Take this example of 2 outstanding student loans:

Loan 1: $25/mo payment; $1,000 outstanding; 3% interest rate

Loan 2: $75/mo payment; $9,000 outstanding; 8% interest rate

With the snowball method:

  1. Pay minimum of $25 on loan 1 and $75 on loan 2

  2. Take your extra monthly cash (say $30) and put towards loan 1 payment

  3. After loan 1 is paid off, pay $130 towards loan 2 ($25 minimum loan 1 payment + $30 extra + $75 minimum loan 2 payment)

Reminder, be sure to pay the minimum required on your other outstanding loans in order to avoid the accrual of additional fees as you are paying off the target loan.

By Brad Schaeffer

This blog is for general educational purposes and does not constitute specific financial, tax, or legal advice. Please contact our firm for precise advice applicable to your personal financial situation.

Brad Schaeffer