What Is Debt Snowball?

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Lately, it seems that the majority of people and businesses have accumulated a certain level of debt. This experience is rather usual, especially for those in the middle class. You have all of these needs that you want to achieve, and yet you do not have the money for it. This is why we settle with borrowing money from various institutions. You can now buy it, but you have some impending payments in a few months to even years. It can be from your credit card or loaning institution. As long as you have borrowed it, this is still considered as debt.

 

However, most of us do not just borrow from one institution. We can have different kinds of debt from various lenders as well. It can get disheartening to see all the demand letters and collective measures other companies do. Even though you have understood what you have wanted, you still need to live with those choices. Sometimes, it is a smart move; other times, it’s not. This is why many businesses in the UK follow a particular strategy to pay off their credits. One of them is debt snowball.

 

Debt Snowball – Explained

 

You know how to form a snowball, right? It starts with a little blob of ice. As you pack more into it, the mass increases as well as it’s size. This provides heftiness which is necessary for throw physics. In business, this refers to the method of paying off debt by prioritising the smaller amounts first before the bigger ones. There is the philosophy behind this, which follows the idea that the smaller ones first would be the easiest to handle. 

 

Why are people into this? Well, it is more to do with the psychological aspect of dealing with debt. As humans, we would tend to find the easier route since it would be the faster way. We are innovative in creating a better opportunity for ourselves. If we can resolve the smaller problems, we can tackle the larger ones as well. It is a psychological push that you might need whenever you are feeling frustrated about your situation. 

 

For example, if you have a debt of £5,000, £3,000, and £100, it would be easier to deal with the £100 first. That way, there is one less thing to fuss over. Of course, it would be more efficient to pay off the whole £8,100, but you may not have that amount yet. This is why it would be best to start small. It might not be much, but it is going to be a good start for anyone.

 

Pitfalls Of The Strategy

 

Aside from the psychological advantage, there is no other advantage that this strategy offers. On the other hand, it is rather inefficient. For one, most of the loans and debts with more substantial amounts will have a higher APR or Annual Percentage Rate. This means your debt will increase the more time that passes. You would need to track this accurately or else you would end up forgetting one. This can get worse as you approach the end of the fiscal year. It might be a good thing for your mental health, but it would be downright brutal to your future finances.

 

This strategy is also the antithesis of the more traditional approach, that is to prioritise the larger ones first. However, it is still essential to follow the method that is going to work for you. This may need to be evaluated thoroughly, however, and you can sure use some expert help.

 

If you need some professional advice regarding the handling of significant debts or going into one, feel free to consult with our firm, Annette & Co. We’ll even throw in a free business consultation just for you!

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Annette Ferguson

Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certifed Profit First Professionals. Helping Online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.