Upon careful consideration of the middle-class households in India today, we find that more than 80% of the households have debt in some form or the other. Availing credit to own assets such as a house or a car, as well as student loans for higher education and credit card debts are quite common. The economy is also favorable towards taking credit as there is an increase in the advantages tied to it. The inflated economy too is partially responsible for this pro-credit trend in society. The cost of living and lifestyle changes have a huge impact on the saving tendency of the average person. Often, savings are zero or so insignificant that they cannot be enough to cover the cost of emergencies such as hospitalizations or medical costs.
The presence of multiple credit sources has prompted one to opt for more than one variety of credit. Instant cash loans are a popular credit product in the market today, and mostly offered by Fintech and P2P lenders. This accompanied by mindless usage of easily and readily available credit has pushed many into the vicious debt pit. Often, those accessing easy money like credit cards and personal loans fail to consider the long-term catastrophic effect on the monthly budget. They tend to overlook the fact that borrowed money needs to be repaid along with interest.
By the time realization hits, debt might have increased, and to bring it under control might seem like a daunting task. However, with persistence and careful planning of funds, it is doable. Experts vouch by two methods to manage debt: the stacking method and the snowball method.
What is Snowball method?
The snowball method of managing debt is a strategy by which the smallest debt is tackled first. By moving from the smallest to the largest debt, the payments gain momentum and it continues to grow until all the debt is paid off. In this, after paying off the smallest debt in full, the amount meant for repayment is redirected towards the next smallest balance, and so on.
The Pros and Cons of the snowball method
With any method in question, there are advantages as well as disadvantages. In the snowball method, the advantage is the psychological satisfaction that the person sees upon clearing a debt. This is a highly motivational factor and it keeps the person encouraged enough to ensure that all debts are paid off in their entirety.
The snowball method is, however, quite expensive and slow. The fact that it ignores the interest rate applied on a larger loan amount can have a huge impact. It is a fixed strategy and so ignores increased incomes and bonus payouts that can be directed towards paying off the higher debt amount. The process is also fairly slow as the snowball method takes time to be effective for all sources of loans.
How does the snowball method work?
Being inspired and motivated enough to persistently repay loan amounts is the inspiration for this method. To try this method of clearing debt, first make a list of all your debts from the smallest to the largest one. Allocate your funds towards paying a minimum for all the loans and dedicate as much cash as possible towards repaying the smallest debt. Once the smallest debt is paid off completely, dedicate an amount towards repaying the next smallest debt. The amount of cash that you dedicate to this second debt will be the minimum amount that you were paying, plus the amount that you were paying the first loan. So, the snowball of payment keeps growing bigger and bigger and will continue to motivate towards clearing the debt.
A step by step guide to managing debt through snowball method:
- List your debts starting with the smallest to the largest.
- Make minimum payments on all your debts except the smallest one.
- Pay as much as possible on the smallest debt.
- Repeat until the smallest is repaid in full.
- Now, dedicate this amount towards the next smallest debt, so on and so forth till all the debts are cleared.