Couldn’t you resist that trip to the Mayan Riviera last year? Were you going to buy a “normal” mobile and ended up with the last iPhone? Sometimes the expenses get a little out of hand, and we end up with some holes that we have to cover.
However, the money invested in their home represents the highest debt item, a total of 77.5% of it. But do not worry; if you have any debt, we will explain how to settle it with the Snowball Method.
Reducing debt is the first step to achieving financial stability. An important point is to always allocate a part of what we earn to savings. But before reaching this point, it is necessary to reduce the economic burdens, that is, the debts that haunt us. How? With the Snowball Method.
The Snowball Method
This system is focused on reducing debt, both in your domestic accounts and in your business. It is based on prioritizing the smallest debts instead of focusing on the debts with higher interest rates. The Snowball Method was born as a result of the research of several members of the Harvard Business Review.
The experiment consisted of the participants simulating that they had paid their debts virtually. After several analyzes, the researchers came to the conclusion that the factor with the greatest impact was not the amount that remained to be paid, that is, the remaining debt, but the amount that they had managed to get out of the way once paid.
People feel more motivated and hopeful when they see that part of their debt is being eliminated, no matter how small. In other words, focusing on paying off debts with less amount of interest rates tends to have a much more effective effect on the progress of total debt reduction.
The Snowball Method is not just an experiment. Many people are starting to use it every day to minimize their debts, find financial stability and start saving. An example is found in the blogger dedicated to personal finance, Derek Sall. This person was able to reduce the value of his debt, including his mortgage, by $ 100,000 thanks to the Snowball Method.
His experience was so beneficial that Sall decided to share his spreadsheet on his blog to help others with debt repayment. And we have collected this spreadsheet to help you reduce your personal or business debt. Upon entering the blog, Sall writes the following: “ I suggest that people pay their debts from least to greatest . You will deal with them more efficiently, and you will be able to eliminate all of them sooner than you had in mind ”.
How to use the Snowball Method
Based on Sall’s spreadsheet, we are going to see step by step how to deal with payments. It is a simple and easy way to understand how to use the Snowball Method.
- First, you have to calculate your financial capacity. To do this, know how much debt you can currently pay, the fixed expenses or your maximum budget. The more financial effort you make now to get rid of your debt, the less you will have to pay later and, therefore, the sooner you will achieve stability.
- Once the first point is covered, you have to calculate how much you can allocate to the highest debts. The idea is to see if you have the capacity to allocate a greater amount each month to pay them.
- Finally, you must enter in the spreadsheet that you have created all the debts you have, ordered from lowest to highest. You must include the interest rate of each of them and the minimum monthly payment for them. With this calculation, you can check how many months you will have to dedicate to paying your debtsuntil you are able to eliminate them completely.
What do you think of this method? Have you ever considered it? We are sure that it works on its own, but to notice the results, it is necessary that you know the total volume of your debts. It is important that you manage the remaining amount of your debts and how you pay them month by month. As you can see, organization and motivation are very important to eliminate your debts. You will see how when you have managed to organize yourself; you will begin to start building your economic mattress and goodbye to your debts!