When you decide to take the first step in the long journey of paying off your debt, you’ve got some tough decisions to make. What can you cut from your budget? How can you earn some extra cash? Is this really all worth it? (Spoiler alert: it is) The biggest and toughest question is: How in the world do you start?
There are a few schools of thought and they all have their perks:
- Pay off the largest balance first and work down the list
The advantage here is that you chip away at your biggest balance and bring it down to a reasonable level.
- Pay off the smallest balance first and work up the list
You get the little boost of excitement and motivation that comes along with paying off an obligation.
- Pay off the balance with the highest interest rate first and work down the list
When you do this, you can save a lot of money in interest payments over time.
Logically and mathematically, you would think it makes sense to start with the balance accruing the most interest. However, research shows otherwise. According to a study published in the Journal of Consumer Research, paying off your smallest balance first may be the best method.
Small victories beat logic
By tackling your tiniest balance right out of the gate, you’re giving yourself a feeling of accomplishment – you can do this! Those small victories help you to push forward, crushing every balance along the way.
It’s not logical and it doesn’t make much sense mathematically, but it works. Study after study has shown the benefit of this “snowball” approach. It might go against what you’ve believed to be true, but it works.
A tried and true method
The Snowball Method has been around for a while but has gained popularity with the publication of studies singing its praises. Critics of the method say that people with more financial discipline can get ahead more quickly by paying off the credit cards and loans with higher interest rates first. But let’s be real here: people with more financial discipline probably aren’t in that much debt.
The average household is dealing with almost $17,000 in money owed to creditors. Debt consolidation loans and debt management firms are big business. The cost of living increases each year while income remains stagnant. That creates a need for some to run to debt to cover life’s necessities. When that happens, balances can get out of control quickly.
This debt repayment method requires some work to get up and running, but once you have some momentum, you can see the positive impact of starting small.
Not a hard and fast rule
You know that you need to pay off your debt, it’s figuring out the how that puzzles most of us. What’s most important is that you get going. The Snowball Method allows you to do that with a bit more ease than other debt repayment methods. It may not be the right fit for everyone, though. Here are some other ideas for paying off debt.
However you decide to proceed with your payoff, you need to begin the process somewhere. Knowing that this method works best from a momentum standpoint should be a good starting point – now all that’s left is to start.
Gather up all your bills and tally them up. It might be a little shocking, and that’s ok. You can do this! Once you have your list, determine what you can pay toward the smallest balance while also covering your minimums on the other debts owed. Once that small balance is paid off, move on to the next smallest. You’ll start to see progress in no time.
