Baby Step 2 – The Magic of the Debt Snowball

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The Debt Snowball is arguably the most important of the Baby Steps as it not only clears your debt, it changes your attitude towards money.

Baby Step 2 (BS2) is to work on your Debt Snowball

The Debt Snowball is a technique to reduce your debt that works by your paying off your debts smallest to largest (regardless of the interest rate), this may seem a bit counter-intuitive to some people but it’s about changing your attitude to money more than it’s about the math. You didn’t care about the interest rate when you took on the debt so why care about it now, just get it paid off.

What is snowballing?

We all know how to build a snowball – you start by packing some snow together tightly between your hands and then gradually add more to make it a bit bigger. Once it’s nice and sturdy you can actually start rolling it through the snow so that it picks up more and gets bigger with each roll.

It’s a bit of an odd analogy but imagine the snow as being the payments you are making towards your debt, each time you have a bit of extra money you add it to the amount you are paying off each month, after a while you finish paying off that first debt so you take that ‘snow’ (those regular payments) and put it towards paying off the next debt in your snowball.

Don’t like analogies? Ok, lets put it in an easy step by step for you

Debt Snowball Steps

1. Make a list of all your consumer debts, order them smallest balance to largest balance.
2. Make sure that you are paying the minimum payment on each one of your debts except from the smallest one – that’s the start of our snowball and we’re going to chuck as much ‘snow ‘ at it as we possibly can!
3. Pay as much as possible towards your smallest debt. So that’s the minimum plus any extra you can find in your budget, from selling items, down the back of the sofa – literally any money you can find, we want that debt gone fast!
4. Once you’ve paid off that first debt we take the money we were paying towards that and start throwing that at the next smallest!
5. We keep going and repeating these steps until the debt snowball is complete.

Why Does the Debt Snowball Method Work?

The debt snowball method works so well because it isn’t necessarily about the maths of the problem, it’s about your attitude and behaviour towards it. By breaking it down into smaller and easier chunks you gain momentum quicker and start seeing little wins – little wins make us happy and get us chasing after the bigger wins and paying off those bigger debts.

Let’s look at it like this-  if you start paying off a large debt first, let’s say you’ve got a large car finance loan because it’s such a large number to start with you won’t see any real traction with it for a while.
Whereas if we start with the smallest debt first you might find you can clear that within a few weeks or months and then suddenly that’s one debt out of your life FOREVER and you’re raring to tackle the next one.

By the time you get to paying off your bigger debts, you’ll have much more cash freed up from not having to pay on those other debts that you\ll be able to through a literal snow boulder at the debt.

It’s all about building momentum and seeing results, those quick wins get you started but the realisation that you can actually get out of debt keeps you going.

When you see a plan working you’re more likely to stick with it, the debt snowball might seem counter-intuitive but it WORKS because it changes your mindset about debt and your ability to be able to get yourself out of it.