Debt Relief: The Debt Snowball Effect

Even though the phrase may be a bit confusing, the fact is the debt snowball is a form of self managed debt relief. It is a way to finally get rid of your debt once and for all. If you think this won’t work, let me assure you, it is possible – and you can do it regardless of how much you owe.

Debt Didn’t Suddenly Show Up

To begin with, you have to realize that your debt didn’t appear overnight and it won’t go away overnight either. The fact is your debt most likely took several years to accumulate and it will certainly take months or perhaps years to pay it off. Now that you have that fact in front of you, forget about winning the lottery as your means of escape! If you want to get out of debt you will need to develop patience coupled with determination. You will also need to stop using your credit cards for all of those impulse purchases!

Okay, Let’s Get Going

You need to know exactly how much money you truly have available and then start paying down that debt. For example, look for ways to decrease your expenses. Eliminate any repeat billings that are not strictly necessary, such as that gym membership, those magazine subscriptions or your cable service with 500 channels and nothing on! Do whatever you can to trim the fat from your monthly expenditures to free up that money for what comes next.

Establish An Emergency Fund

The next step is to start building a cash reserve. Before you can operate the debt snowball you should accumulate a minimum savings of $500 for a single person or $1000 for a couple or family. This money will be earmarked for emergencies – not food or rent. You will need to cover those from your income. If possible, find ways to increase your income so that you have enough to live on, pay your essential bills and make the minimum monthly payments due on your debts to then have the money to begin building your emergency fund. This emergency ‘slush fund’ will be for true emergencies, such as the need to repair your car, because you need a car to get back and forth to work.

It is important for you to understand why you need this amount of savings only for emergency situations. The one thing you don’t want to do is use the money you set aside for emergencies to pay your regular bills. This will only result in you taking that much longer to enact the debt snowball effect. Even though this will take some time, even a year or more, you don’t want to make it any longer than necessary.

Begin Paying Off That Debt

Now that you understand this reasoning, you can start the debt snowball effect. Begin by making a list of all of your debts regardless of their size. Include iva  everything on the list; even that $5 you borrowed from a friend that they never expected you to repay. Arrange the list in order of how much you owe, with the lowest total amount owed at the top of the list. For example, the list would begin with the $5 you owe your friend and end with your mortgage or whatever your largest debt is.

Now, here is where the initial savings discipline you exercised to establish that emergency fund comes in. You will now begin to take all the spare money you have each month – the money that you were putting toward building that emergency fund – and begin paying off those debts, beginning with the smallest debt first.

One Thing To Note

Some well-intentioned people may advise you to pay off the highest interest debts first. While this makes sense in theory, it does not work in practice because the goal is not to be saving a few pennies here and there. The reason you are putting into practice the debt snowball effect is two-fold: You are motivated by a sense of achievement, and you get that whenever you can cross one debt off your list! In addition, as you will see, the end will most certainly justify the means.

Reward Yourself

There truly is a sense of well-being experienced when paying off a debt, no matter the size. For example, imagine how you will feel paying back that $5 ‘loan’ to your friend. There is something to be said for paying off a debt. It is actually a source of encouragement to keep going! The effect of the debt snowball is to motivate you to keep paying off your debts by giving you a great sense of achievement.


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