Availing a loan takes minimum effort, however paying it off could be very stressful; especially managing multiple debts. There are many strategies to reduce debts in a systematic manner and each one has pre-requisites that vary from vast capital requirement to extreme frugality. These conditions may look easy on paper but are difficult to own. However, one strategy that balances both the extremities well is the snowball concept. Let us check out how snowball can help curb and get out of the debt trap.
When you let roll a small snowball on a slope, it becomes bigger as it covers the distance. A similar strategy is used in reducing the debt. Snowball method entails paying off the smallest loan earlier and then ustilising that EMI for the next loan. The process continues till your debt is cleared. It not only helps in paying off the debt but also helps you achieve it without much stress. Before we begin emphasising the effect of snowball strategy, let us check how it can be implemented in our daily lives.
Gather all debt information, which the first and foremost necessity to apply the snowball effect. No matter how small or big, you must take into consideration all of your debt.
Categorise debt with smallest at top. Target the smallest debt and repay it in full or to the maximum possible extent.
Target the next akin smallest debt. Once the smallest debt is paid, the immediate focus should move on to the next in line smallest debt.
Status quo by paying minimum dues of other debts. Focusing on smallest debts does not mean leaving alone other debts. Therefore, paying the minimum dues will not only keep reducing the debts but also safeguard your credit health.
Keep new loans at bay. The unsaid fact of the snowball strategy is while implementing the above steps, keeping the new loans or dues to zero. If this critical step is missed, it will nullify the above critical steps as well, therefore building up of an emergency fund, health insurance or liquid investments are necessary to avoid skipping of this step.
Slow, steady and consistency wins the race. Following the above steps consistently will eventually help you achieve the zero debt status. However, the significance is consistency is the only way up.
Snowball strategy could the easiest way to reduce your debts. But, it has its share of cons. Snowball strategy works mainly gives psychological boost impact. Once the first smallest debt is repaid and chalked off the list, its success turns your attention to achieve the next one. Although the debt begins to reduce, the interest piles up on the larger debts. The larger interest means you may actually end up paying more interest in the snowball strategy than others.
In addition, the snowball strategy relies heavily on the assumption that no new loans are availed while the plan is being executed. Since we live in an uncertain world, need of money may arise anytime and in such quantum that even an emergency fund may deem insufficient.
Each financial planning or debt repayment strategy has its pros and cons. While choosing any strategy it is wise to focus on the strategy that suits our needs and wants. Simply ignoring all the strategies and repaying the minimum dues is not only delaying your financial objective but also becoming debt free.
To conclude, snowball strategy is for those who are looking for inspiration or lacking conviction. But it is worth remembering that irrespective of any strategy the most important part is staying committed to the chosen strategy.
(Viral Bhatt is the Founder of Money Mantra — a personal finance solutions firm)
