Paying off debt a process. It is not something that just happens over night or in a couple of weeks. You can’t just throw money at a debt even now and again. Expect it to magically disappear.
My family is currently in debt. I am not ashamed about it. It is something that we have let happen when we attempted a failed move interstate in 2019. We are the ones who coursed this debt to occur and now we are the ones who need to have a plan to pay it off.
As debt is such a big issue for many people. I am going to share with you the process of how to set up a Debt repayment plan called a Debt Snowball. This is the one method we use as a low income large family. As it fits into our budget, but also deals with your debt.
The Method is called the snowball because we are taking our smallest debt repayment, a small snowball. Going to stand at the top of at our debt snow hill. Then roll this small debt repayment snowball down hill, watching as it gather more volume, money, on its way down. As it slowly build up speed and clears snow, clears debt. Until the large debt hill in all gone and the snowball repayments are all you have left.
Before You Get Started
Firsts things first. You need to have a working budget so you know how much money you have spare to put towards debt. Creating a budget allow you to make your money work for you. Getting the most out of every cent that comes your way.
Without the basic understanding of you income and expenses you won’t be able to pay off debt successfully. Once you have a budget you can start to see the wiggle room you have to work with to put towards your debt. Even if the amount is only small. It is still more than the required minimum repayments that are keeping you in debt for longer.
How To Use The Snowball Method
#1 – Write Down Your Debt With The Balance
The first step in the Snowball Method is to write down your debts with their balance owing. Order your debts from smallest at the tops, to largest at the bottom. There is no need to complicate this with interest because we are focusing on the minimum repayments.
#2 – Pay the Minimum Repayments
To pay off debt you still need to be making minimum repayments across all your debts. Remember that how the turtle bet the hare in a race. We still need to be making the minimum repayments required, so we don’t fall further into debt. We don’t need anymore late fees or to have our debts to be handed over to Debt Collectors.
If you are making all the minimum repayments and find that you have no wiggle room in your budget. Then it is time to look into cutting the extras. This could be Netflix or Stan. It may be some sort of subscription that you can live without for a while. We need to find a way to have a little extra cash to put towards your debt Snowball. You may have to rework your budget a little bit.
#3 Start Making Payments
Once all the required minimum repayments are made. And your have found some extra money to make your first extra payment snowball. It doesn’t matter how big or small it is. as long as it is something. We are going to take this snowball and put it to your smaller debt amount.
You will continue to make this payment until you have cleared this first debt. Than the snowball is really doing to start gaining momentum. Because now that you have cleared this first debt. We will take both your extra payment snowball and add the smallest debt repayment together. Growing our snowball to then start making extra payments at your second smallest debt. That has now become the smallest debt.
How This Looks In Real Life
I am going to use my own debt as a bit of an example. So it helps make things more understandable.
I currently have four debts. And I will be making the payments weekly so they are not all over the place and become confusing. They are as followed:
- Afterpay – Owing Amount Of: $387 – Weekly Repayment: $80
- Water Bill – Owing Amount of: $398 – Weekly Repayment: $47
- Gas Bill – Owing Amount of: $1,989 – Weekly Repayment: $50
- Credit Card – Owing Amount of: $5,031 – Weekly Repayment of: $60
I have included bill debts as well. For the reason of we are unable to make full payments because we are a low income family. However I have called each company to discuss payment plans for the bills which has stopped any late payments fees being added to the total bill amount. That is why there is a minimum repayment.
During our budgeting process we have been able to find $40 to be able to put towards our debts. And with the snowball method, I will use this to make an extra payment on the first debt we have. That would be Afterpay.
If you are Australian you may know Afterpay as a buy now, pay later shopping app. What you may not know about Afterpay is that is considered a debt, if you where applying for any sort of loan. Surprise!!! I didn’t know this until we went to see a mortgage broker to understand our lending capability for a home loan last year. This is why I always include Afterpay as a debt, no matter the amount.
Keep The Building The Snowball
Now that the first debt amount has been cleared after maybe a month or so. This depends if your extra repayment can remain the same each pay period or changes. Do what works for you, just try and make an extra payment each time.
It has now become time to build that extra payment snowball. To do this you will be taking the extra payment and adding your first minimum repayment. For me that is the extra payment of $40 and adding the Afterpay minimum repayment of $80. Making my new extra payment snowball $120 to go towards the next debt that I owe.
This is the process to building you snowball and paying off your debt. By the end of our own snowball building process, we should have a snowball extra payment amount of $217 to put towards our credit card debt. Along with the $60 standard minimum repayment. And if everything goes to plan, our own debt should be cleared in about 10 months.
It can be a slow journey paying off debt when you are on a low income and have very little money to spare. Things can bleak at the start when you first start trying to clear debt. But it can be done, even if you only have a spare $10 per week or fortnight. An extra payment is an extra payment. It is also easier to fall but into debt when you are living on a lower income bracket. That is why learning to live within your means through budgeting and planning is so important.
Don’t be ashamed of your debt….
Nobody is born being good with money. We learn how to be good with money through making mistakes. Debt can comes with making mistakes, but mistakes are just lessons. Just like we learn what lead us to debt and then learn how to be smarter when it comes to how we use money. Don’t give up, stay motivated knowing you are doing something about it. And keep trying.
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