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Snowballing….

No, I don’t mean throwing actual snowballs although I have included a lovely picture of a snowman to make this post a little more interesting as it’s one of those boring but helpful (I hope) posts about budgeting….

When I say snowballing, I’m referring to paying off your credit cards and other unsecured lending in the most cost efficient way possible.

It’s all about paying your debts off in the right order so that you pay the least amount of interest on your debts and pay them off as quickly as possible.   The best way to do this is to pay the minimum payment each month on all of your outstanding debts and use any extra money you have leftover in your monthly budget to pay more to the debt with the highest interest.

Then, when the first debt is fully paid off, instead of having extra money each month, you should use the money you would have been paying the first debt with to start paying extra to the debt with the next highest interest rate.

Once the next debt is paid off, move on to the next one and so on until you’re all paid off and debt free (in an ideal world).  Then you can then start paying extra on your mortgage or just enjoy having the extra money in your bank account each month.

It’s called snowballing because each time you pay a debt off, rather than getting used to having the extra money, you just put it towards paying off your next debt.  So each time you pay off something, the payment to the next debt gets bigger, meaning you pay it off quicker and therefore, you pay less interest.

Does that make sense?

There’s a calculator that can help you work out which order you should be paying your debts off in here but it’s quite easy to work out yourself if you just gather up a statement from each account so you can put your debts into order of the highest interest rates.

10 comments to Snowballing….

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