Snowball Strategy
Meet Priya
Priya has the following debts:
1. Credit Card A: ₹10,000 with a 15% interest rate
2. Credit Card B: ₹25,000 with an 18% interest rate
3. Personal Loan: ₹1,00,000 with a 12% interest rate
4. Car Loan: ₹2,00,000 with a 10% interest rate
Step-by-Step Process
1. List All Debts: Priya lists her debts from smallest to largest balance:
- Credit Card A: ₹10,000
- Credit Card B: ₹25,000
- Personal Loan: ₹1,00,000
- Car Loan: ₹2,00,000
2. Minimum Payments: She makes minimum payments on all debts to avoid penalties. Let's say these minimum payments are:
- Credit Card A: ₹500
- Credit Card B: ₹1,000
- Personal Loan: ₹2,500
- Car Loan: ₹4,000
3. Extra Payments on Smallest Debt: Priya decides she can afford to pay an extra ₹2,000 each month. She applies this extra money to the smallest debt, Credit Card A.
- Total payment towards Credit Card A: ₹500 (minimum) + ₹2,000 (extra) = ₹2,500
4. Pay Off the Smallest Debt: In about four months, Credit Card A is paid off (₹10,000 / ₹2,500 ≈ 4 months).
5. Celebrate and Redirect Payments: Priya celebrates her success! Now she redirects the ₹2,500 she was paying towards Credit Card A to Credit Card B.
- New payment towards Credit Card B: ₹1,000 (minimum) + ₹2,500 (extra) = ₹3,500
6. Move to the Next Debt: In about seven months, Credit Card B is paid off (₹25,000 / ₹3,500 ≈ 7 months).
7. Repeat the Process: Priya then redirects the ₹3,500 towards her Personal Loan.
- New payment towards Personal Loan: ₹2,500 (minimum) + ₹3,500 (extra) = ₹6,000
8. Continue the Snowball Effect: After paying off the Personal Loan (₹1,00,000 / ₹6,000 ≈ 17 months), she redirects the ₹6,000 towards her Car Loan.
- New payment towards Car Loan: ₹4,000 (minimum) + ₹6,000 (extra) = ₹10,000
Psychological Boost
Priya finds that paying off each debt gives her a sense of accomplishment and keeps her motivated. Watching her list of debts shrink also reinforces her commitment to becoming debt-free.
Summary
By using the Snowball Strategy, Priya systematically pays off her smallest debts first, gaining momentum and staying motivated through quick wins. She eventually becomes debt-free, having effectively managed her finances without feeling overwhelmed.
