Remember when you were little and building a snowman in your yard (note: snowman-building is never, ever limited to a kid’s activity)? You donned your snowsuit, boots, scarf, hat and mitts and stepped outside into the cold. At first you were intimidated by the gargantuan task ahead of you, but that passed quickly and filled with the childish confidence, you set about building your snowman.
Paying off debt reminds me a little like building a snowball: both seem very intimidating at first, but both are very achievable – all one has to do is start small and let the momentum grow from there.
In fact, the snowman analogy lends itself quite well to a method for paying off debt that’s very popular, and proven, in the personal finance blog-o-sphere: the snowball method. The snowball method is defined as paying off all your debt in order of smallest debt to largest debt.
Conventional wisdom, and even logic, will tell you that you should pay off debts with the highest interest rates first. While this is not wrong, many people find it incredibly discouraging to have their first debt-elimination steps be their gigantic credit card balance with the 22% interest rate.
When facing a large looming debt first, as many people tend to do, debt repayment can be discouraging, and even seem impossible. So for those of you who’ve tried to tackle your largest debt first, only to give up, why not start with something small; your $100 overdue cell phone bill? Next paycheque, settle that bill, while making minimum payments on everything else. Once the cell phone bill is up-to-date, start paying off that $200 balance on your department store card while making minimum payments on everything else. Then, tackle your credit card with the smallest balance, etc. etc. Finally, you’re ready to face your biggest debt. Knowing that this is your last debt, you’ll feel more confident about facing it, since you’ve succeeded in paying off all of those smaller balances.
With the snowball method, debt repayment becomes less stressful and more empowering because you can pay off the smaller debts faster and therefore feel a sense of achievement and relief faster. Allowing yourself to feel the immediate gratification of paying off each outstanding balance will keep your motivation and momentum going as you obliterate your debt.