How to get debt-free?

Dear Readers,

Welcome back to another exciting edition of our newsletter!

Today, we're going to tackle one of the most powerful and effective strategies for conquering debt: the Debt Snowball Method. Imagine yourself on a mountain expedition, facing a formidable debt mountain. With the Debt Snowball Method, you can conquer each summit, one snowball at a time. So, strap on your climbing gear and let's dive into this financial adventure!

🏔️ What is the Debt Snowball Method? 🏔️

The Debt Snowball Method is a proven strategy for tackling debt, designed to provide motivation and momentum. Instead of focusing on interest rates, you'll start by targeting your smallest debt while making minimum payments on others. With each victory, you'll gain confidence, snowballing your way towards financial freedom.

Step 1: Gather Your Debt Inventory

To begin your debt conquest, gather a list of all your debts, including credit cards, loans, and outstanding balances. Let's say you have the following debts:

1️⃣ Credit Card A: ₹4,000

2️⃣ Personal Loan: ₹8,000

3️⃣ Student Loan: ₹15,000

4️⃣ Car Loan: ₹12,000

Step 2: Arrange Your Debts in Order

Now, organize your debts from smallest to largest balance. In our example, the order will be:

1️⃣ Credit Card A: ₹4,000

2️⃣ Personal Loan: ₹8,000

3️⃣ Car Loan: ₹12,000

4️⃣ Student Loan: ₹15,000

Step 3: Minimum Payments and Snowballing

Make the minimum payment on each debt, ensuring you meet your obligations. This keeps your financial ship afloat. However, it's time to supercharge your efforts.

Focus all your extra funds on paying off the smallest debt first, while continuing to make minimum payments on the others. Let's assume you can allocate an additional $500 per month.

Step 4: Conquering the Smallest Debt

In our example, you apply the extra ₹500 to Credit Card A, making a total payment of ₹700 (₹200 minimum payment + ₹500 extra). Within six months, Credit Card A is paid off!

Step 5: The Snowball Effect

Now comes the exciting part. Take the total payment you were making on the smallest debt (in this case, ₹700) and add it to the minimum payment of the next debt on the list. Let's look at the Personal Loan.

Minimum Payment: ₹300 Snowball Payment: ₹700

Total Payment on Personal Loan: ₹1,000

Step 6: Scaling the Debt Mountain

With the increased payment, your progress accelerates. The Personal Loan, once daunting, starts to crumble. Using the Debt Snowball Method, it takes 12 months to eliminate the Personal Loan entirely.

Step 7: Moving Up the Peaks

Now that you're debt-free from Credit Card A and the Personal Loan, it's time to channel your financial momentum towards the Car Loan.

Minimum Payment: ₹500 Snowball Payment: ₹1,000

Total Payment on Car Loan: ₹1,500

With this increased monthly payment, you make remarkable progress. The Car Loan is fully repaid within 8 months.

Step 8: Reaching the Summit

With only the Student Loan remaining, you're in the final stretch. Allocate the accumulated payments from the previous debts towards your Student Loan.

Minimum Payment: ₹600 Snowball Payment: ₹1,500

Total Payment on Student Loan: ₹2,100

The Student Loan, once towering over your finances, succumbs to the snowball effect. Within 14 months, it's conquered!

Conclusion:

The Debt Snowball Method works because it harnesses psychological momentum, encourages consistent behavior, and creates financial breathing room. By starting with the smallest debt and gradually tackling larger ones, you experience quick wins, stay motivated, and build confidence. As each debt is paid off, you free up money to put towards the next one, accelerating your progress. It's a simple and effective approach that helps you stay on track and ultimately conquer your debt.