Debt Snowball is a payoff method used to be free from debts. Paying your debt more than the minimum amount required. Like a snowball, it starts paying off debts from the smallest amount to the highest.
One might argue that prioritizing the highest interest rate debts should be prioritized, but due to the nature of humans, Debt snowball seems to be the most effective.
How is it more effective?
When you have small amounts of debt, it won’t matter.
When you have several institutions collecting higher amounts of debt, it will be exhausting psychologically.
Paying them off one by one will give us the feeling of fulfilment which motivates us paying off the other debts until mortgage is the only one left. Like in games where you spend hours to level up, then you feel like playing more until you finish the game.
Why use Debt Snowball Chart?
By using Debt Snowball Chart, you will see how much you can save from interest and how fast you can finish paying your debts. Long term debts with high amounts such as mortgage are not included here.
How do I use this snowball chart?
As a start, lists these about your debts:
- Current Balance
- Annual Effective Interest Rate
- Minimum Payment
Then check your budget to see how much you can pay monthly for your debts. This will be your planned total monthly payment
Total Monthly Payment should be higher than the total of the minimum required payments. If you pay less than the minimum required, you will incur penalties.
Once you have all these inputs from above, you can already see how cheaper and faster you get.