DEBT SNOWBALL METHOD
The debt snowball method is one of the most popular ways of paying down your debts.
With the debt snowball, the first step is to list all your debts in order of SMALLEST to LARGEST, and write down the minimum payment for each one!
(This should be available on your statement if you are not sure).
What you're going to do is pay all of your minimum payments for each debt (you always want to make at least the minimum payment to avoid impacting your credit score) and then focus all your overpayment efforts on the SMALLEST balance debt.
This would mean any money allocated to debt overpayments in your budget, and also any extra unexpected money all goes toward your smallest debt, irrespective of the interest percentage.
As an example, you might have the following debts:
Loan 1: £800
Credit Card 1: £1,500
Credit Card 2: £5,500
Loan 2: £6,000
Minimum payments:
Loan 1: £100
Credit Card 1: £30
Credit Card 2: £55
Loan 2: £200
Total minimum payments: £385
In this scenario, you would pay your minimum payment of £385 every month within your fixed expenses. Then you would overpay against Loan 1 first (the smallest debt) and then the credit cards, and then Loan 2 (the largest debt).
Once you have cleared your first debt (hooray!) you use the money you would have paid towards the minimum payment and throw this straight towards your next debt as an overpayment!
So in the example above, once Loan 1 was paid, the £100 you would have been used to paying to the minimum payment goes straight to your next debt (Credit Card 1), as you're already used to paying your £385 as a minimum before any overpayments.
This is the snowball effect!
Then as with Loan 1, you carry on making all overpayments to Credit Card 1 until it is cleared, and keep repeating this process until all your debts are gone.
This method means that you should reduce the number of debts you have quicker, and as each debt is cleared, more and more will be paid to your next highest debt helping it get cleared faster. By reducing the number of debts you have and making visible progress, this helps keep up the motivation to keep pushing through to becoming debt free!
However, depending on the interest rates of your debts, this method could cost you more in interest than the debt avalanche method if your largest debts are also the highest interest.
If you're not worried about the motivational impact of ticking debts off in order as above and want to make the best interest savings, you could combine both the snowball and avalanche methods together.
This would be where you follow the process above, but instead of smallest to largest debt balance, you order your debts and start with the highest interest rate first, and then once each debt is cleared you would continue to use the minimum payments and overpayments as the snowball toward your next debt. This would give you the biggest interest saving possible.
My budget tracker lets you know how much you can save or overpay, and tracks all debt payments and overpayments which are also shown in progress charts too.
Link below to get yours