A Practical Way To Pay Off Your Debt:The Snowball Method

Snowball

Most personal finance experts advice that the best method to get out of debt is to pay off your high interest debts first. While this makes text book and mathematical sense, personal finance success is 80% behaviour, and 20% mathematics. We become good at it by focusing more on methods that reward good behaviour, and keep us going.

Recommended by personal finance guru, Dave Ramsey, the snowball method differs from the traditional method in that you pay off your small debts first, then this generates extra cash that you use to pay the larger debts. As you continually eliminate the small debts, you free up more money to pay the bigger debts and in no time, you’re debt free.

How it works

By this point, I’m assuming that you have fostered the basic personal finance disciplines;living below your means, tracking your expenses, maintaining a sensible budget,sticking to your budget , and you have started paying off your debt in some formula. If all this is in place, take the following steps and watch your debt slowly disappear:

1. First accumulate an emergency fund. Dave recommends $1,000 (Kshs 86,000), but I prefer building an emergency fund that is equivalent to three months worth of expenses (excluding debt repayments). This will ensure that you don’t fall back into consumer debt, should you lose your income for whatever reason.

2.List all your debts, starting with the ones with the lowest balance first. Most people prefer to be ignorant about the state of their debt. We have bank loans, for which we have no idea what the loan balance or interest payments are, we just make the monthly repayments on auto pilot. This is very dangerous because sometimes interest rates change, and while your monthly repayments remain the same, the loan repayment period is extended and you will be none the wiser (for some reason, banks won’t communicate this). Call your banker and your other creditors and ask for loan statements.

3. Budget to make only the minimum required payment on all your debts. This will leave you with a little extra cash that you can use to start building your snowball. With this, pay off your smallest debt first. Continue doing this, building momentum as time goes by. You are on your way to being debt free, with each small debt you pay.

4. Celebrate! Whenever you finish paying off a debt, treat yourself to celebrate and to stay motivated (only don’t get into debt doing this).

Always remember, financial discipline is 80% behavior, 20% mathematics.