Small Stuff Matters – Debt Repayment Tips

Snowball Debt Method

Snowball Debt Method

Sometimes dealing with a large debt burden feels like a mammoth task, something so daunting that it’s hard to know how to approach. That feeling of hopelessness and confusion is one of the worst parts about being in debt.

Luckily with a few simple concepts, you can begin to attack your debt burden and really feel like you are making real progress. Once you begin to make real progress you can feel momentum build and suddenly your successes are stacking up, then the debt burden and related stress is melting away.

The main concept for dealing with substantial problems is very simple – start small – break everything down into small achievable chunks.

One of the techniques that uses that “start small” ethos is the snowball debt repayment method. That is where instead of tackling the highest interest rate debts first (which would usually be the most logical choice), you go for the small debts first. The idea is that by quickly paying off small debts you feel successful, momentum builds, positive feedback builds and the debt problem is less complex because there will be less sources of debt.

Say for example you have 4 credit cards, owing $500, $4000, $5000 and $5000. Say the $5000 credit cards are costing you 17% and the $500 credit card is costing you 12%. Most people would attempt to pay back the more expensive card first, but it turns out that it is a slow process with little positive feedback. If you instead attack the smallest debt source, the $500 credit card first – you feel the rush of success when you pay it off and cut the card up. That positive feedback helps you continue on with your debt repayment plan.

This method uses human psychology to help you repay all of your debt instead of becoming discouraged and failing to make a mark in your debt. Having this short term and very achievable goal will motivate you and you will be able to see the finish line. Some of the small debts can be paid off in a few weeks, not in years like the bigger debts. Research backs up the approach and while it might not be the most financially efficient method, it can be the most successful and that is all that matters.

Many people also attach small rewards to their debt repayment goals. So when you manage to pay off that first credit card and cut it up, reward yourself with a nice bottle of wine or a weekend away. Of course nothing too lavish!

So if you want to try the method, here is the complete method for the snowball debt reduction strategy:

1) Take a hard look at your finances
Sit down and calculate what you owe, what you earn and what bills you routinely face. Determine exactly where you are financially. How much in the red are you? Write it all down and be honest about your situation.

2) Be positive about paying down your debt
Don’t be afraid of what you see after doing the sums, there is always a way out of debt. Stay positive we are about to get to work and build a better future.

3) Take a closer look at the numbers, create a budget and brainstorm
Now you have the basic numbers, create a budget. Look for ways to save money, expenses that aren’t necessary, look for clever ways to stop spending. Also look for ways to increase your income. Do you have anything you can sell? Can you ride a bike to work instead of catching a taxi? Can you cancel your cable TV? Can you get a flat mate?

4) Attack the smallest debt aggressively!
Now you have a budget, you should have a rough estimate of what you can pay back. Look at the smallest debt on the list, how many weeks will it take to comfortably pay it off? Jot down the date on a calender, use post it notes, print it onto a poster. Acknowledge this goal and attach a reward to it’s completion. Tell people about your goal! Tell people when you achieve it! Get momentum and enjoy the ride! Enjoy the feeling of having less stress once it is paid off.

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