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We live in a world where excelling in business or personal life is virtually impossible without owing money to someone or several people at some point.
And as long as it’s done responsibly, borrowed money can have the potential to generate unimaginable amounts of wealth, so to speak.
Nonetheless, it comes with a fair share of responsibility. You have to be extremely careful about how you manage debt, including your repayment approach.
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What Is the Debt Snowball Approach?
The debt snowball concept is simple: you pay off your debts from smallest to largest, regardless of interest rate.
The debt snowball method is simply a debt-reduction strategy that involves paying off debts in order, starting with the smallest to the largest.
As you knock out each debt, you gain momentum to clear off even more debt.
The debt with the smallest balance is, by virtue, your first priority.
Once that debt is paid off, you roll the money you were paying on that debt into paying off the next smallest debt, and so forth.
Why You Should Prioritize Some Debt Payments
Perhaps the biggest reason to prioritize some debt payments is that it determines how long it will take before you finally become debt-free.
But that’s not all. Some debts, such as payday loans and credit card debt can accrue huge amounts of interest and penalties rather fast.
Payments for such debts should obviously be prioritized to avoid incurring extra costs, defaulting, and probably hurting your credit.
With this in mind, the debt snowball approach is often quoted as the fastest way to get out of debt easily.
It can also help you save money on interest payments, as you will likely be paying off your high-interest debts first.
How the Snowball Method Works
To employ the debt snowball strategy, you’d typically have to start by listing all your debts in order of the remaining balance despite the interest rate.
From there, you’ll want to make minimum payments on each of your debts, leaving out the smallest one.
For the smallest debt, make sure to pay as much as you possibly can for the month, even if it means getting a side job to afford it.
If you repeat this strategy several times, you could easily say goodbye to all your debts in less time than you possibly imagined.
This is especially if you stay on top of your spending trends or find a way to give your income a boost.
Debts That Should Be Paid First
Of course, the debt snowball concept requires paying off debts with the smallest balances first.
Depending on the various debts you have, the one that comes first could be your credit card debt, student loan, medical bill, and so forth.
But sometimes it pays to consider factors such as interest rate when doing so, which could prompt you into looking for a complementary approach to managing your debt.
Besides paying off the loan faster, some ways to reduce the interest rate on loans may include:
- Renegotiating the loan tenure
- Refinancing
Below is a classical example of how you can do so if you took a student loan.
Refinancing Your Student Loan to Reduce Your Interest Payments
Refinancing is one of the best ways to decrease your loan payments, pay off a loan faster, or even take advantage of lower interest rates in the lending market.
If you benefited from a federal or private educational loan, there are a lot of student loan refinancing options out there that you can take advantage of.
Whether or not your student loan has the smallest balance in your list of debts, refinancing can be an option to consider when using the snowball approach to pay off debts.
The debt snowball strategy can be an amazing way to clear off debts faster and more manageably.
With the right approach, it could end up saving you money in the long run, and you can even consider investing somewhere for revenue.
It’s also a great way to protect your credit; however, you look at it.
