Snowball: How to use this technique to get out of debt fast

May
4, 2021

5 min read

Do you have a debt ? Don’t be ashamed because you are not alone. According to the 2018 National Survey of Financial Inclusion, 6 out of 10 adults have some formal credit. However, only 35% of people have a budget and 58% of them do it mentally.

Having a debt is not bad, since well managed, they can help us to access goods more easily, such as a home or a business. However, before accessing a loan it is important to know your ability to pay.

Citibanamex gives us this formula to know our debt capacity, it is the maximum capital for which we can borrow without running the risk of incurring in the non-payment of the credit:

Borrowing Capacity = (Monthly Income – Fixed Expenses) x 0.35

According to Juan Luis Ordaz, director of Citibanamex Financial Education in a statement, what we can allocate monthly to the payment of credits should not be greater than 35% of personal or family income, discounting fixed expenses (the expenses that month after month it is necessary to make, such as the payment of rent or maintenance, electricity, water, tuition, the pantry, payment of credits, etc.) For example, for a person who earns 10,000 pesos whose fixed expenses are 6,000, his debt capacity is $ 1,400 pesos ($ 10,000- $ 6,000 = $ 4,000 * 0.35).

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The snowball technique

One technique that has become popular is that of the snowball. It is a method that can work for you to stop all kinds of debts, but it requires a certain order and discipline. In short, it seeks to pay off the smallest loan you have as quickly as possible and thus subsequently, gradually increasing the money you allocate to pay off your debts.

How does it work?

1. Make a list of all your debts. Include the amount you owe on each one, the interest you pay per month, and the minimum monthly payment you have to pay for each one. You can do it on a computer spreadsheet or notebook.
2. Once you have this information add the total amount of all your debts. Do not be sad! It is important to know where you really stand and that you can afford it.
3. Sort your debts. Register your debts in the following order of priority: first come those that affect basic needs such as: rent, electricity, water, etc. In the next position, the most expensive loans, you can identify them since they have the highest interest rate. The following debts order them from the lowest amount of debt to the highest.
4. It starts with a debt. You will pay all your debts with the help of this method. We suggest you pay the minimum payment in all cases, with the exception of the debt that you put in the first place, in it pay a little more than the minimum, as much as you can. Do it this way until you finish paying the debt with the highest priority. It is comforting to see the total amount you owe decrease.
5. Let’s go for the next one. Once you have finished paying your first debt (paying more than the minimum in it and the minimum in all the others) we go for the second. How are you going to pay for it? The amount you were paying of your first debt (all) should be allocated to the second. So you will pay the second in much less time and in the rest of the debts you will continue to pay the minimum.
6. The amount you have grows like a snowball. Since you paid the first and second debt, it is important to allocate the amounts that you allocated to them to your third debt, in case you had it, and in the rest you will continue to pay the minimum. Follow these steps until you are debt free. As you can see, as you settle your highest priority debts, you will have more resources to pay your subsequent debts.

This method helps us get out of the smallest debt quickly and frees up a little cash flow to pay off the next one and this creates the “snowball” effect.