Have you been itching to erase your debt for a while now?
If you are in a relatively safe position right now financially and you qualify to receive a stimulus check from the CARES (Coronavirus Aid, Relief, and Economic Security) Act, the debt snowball method is a great way to get you started.
Can You Afford to Use Your Stimulus Check to Pay off Debt?
First things first, is it safe and smart to spend your stimulus check on paying off debt? There are at least two questions you need to ask yourself before considering this.
- Are you still receiving steady income, either from your job or unemployment, and have no trouble making monthly ends meet?
- Do you have an emergency fund saved to cover at least 3-6 months’ worth of all living expenses?
If you answered yes to these two questions, you may be in a safe enough financial position to start tackling your debt. If you answered no to even one of them, it’s best to put any extra money to fulfilling those two goals. After all, the economy is in an uncertain position right now and there’s no telling when things will return to a more normal state, so if you don’t have steady income to cover your expenses and you don’t have an emergency fund saved, don’t risk it by putting your money elsewhere right now.
What Is the Debt Snowball Method?
The debt snowball method is a debt reduction strategy. It is similar in concept to rolling a snowball. You start out with a small clump of snow and continue to roll it along the ground as it gains in size until you’re left with a huge snow boulder.
Except in this case, the snow is your money and you’re essentially rolling it through your debt as the amount you have to pay towards your debt grows and grows until all of your debt is paid off!
How Does It Work to Pay off My Debts?
The method is very simple:
Step 1: Make a list of all your debts, smallest to largest. Don’t include the mortgage in this list and don’t pay attention to interest rates unless you have two debts with equal amounts due; then list the debt with the higher interest rate first.
Step 2: Continue to make minimum payments on all of your debts. If you were paying more than the minimum, stop doing this for now and take the extra money you were paying towards the balance of that debt and add it to step 3.
Step 3: Gather as much extra money as possible. This would be your stimulus check (don’t ever take from your emergency fund or living expenses for this) and any extra money you may have been overpaying on other debts mentioned in step 2. Put all of this extra money towards your smallest debt and continue to put any extra money towards that same debt until it is paid off. Depending on your smallest debt’s balance and how much your stimulus check is, this just might be enough to pay off the debt completely in one payment!
Step 4: Once you’ve paid off your smallest debt, put the payments you made to this debt into your next smallest debt (along with any extra money you can scrounge up) while still making minimum payments on all other debts.
Step 5: Repeat until each debt is paid in full, continuing from smallest to largest. By the time you’ve reached your last loan, you should have a substantial chunk of change to throw at it to help pay it off quickly.
It’s important to note that some lenders, such as personal loans or car companies, will apply extra payments you make towards the next month’s payment, rather than applying it to the principal balance of the loan. If you aren’t sure how your lenders handle extra payments, be sure to contact them and let them know that you want any extra payments to apply directly to the principle. They will be able to give you further instruction on this.
The Reasoning Behind the Method
The debt snowball method is a strategy that relies on your persistence and willpower. As long as you can devote yourself to the method, the results will follow! It’s about changing your behavior, not about being a math wiz or having a large amount of money to begin with.
Even without the help of a stimulus check, you can use this method. Just start with what you have, even if you have to do some side jobs to earn that first lump sum of money to put towards your first debt. All it takes is determination.
Some other methods recommend starting with the debt with the highest interest rate, rather than the smallest balance. While this method can work too, you might find more mental setbacks.
Your highest-interest debt could also be the debt with the highest balance. This could take you many more months or even years to pay off.
When you start with the smallest debt, you are going to see faster results, and there’s no better motivation to keep going than when you pay off that first debt completely! It’s extremely gratifying and gives you the hope that this is going to work.
Once you’ve reached the point of being debt-free, consider how you can keep yourself from going back.