If you’ve been read about tips and tricks to pay off debt, you might have heard of the snowball effect. For those of you who do not know, the snowball effect is when you pay your debts by listing all of your balances from smallest to biggest, and start paying minimum on all debts except the smallest debt. It’ll look something like this
- $50
- $154.52
- $648.10
- $9,454.10
- 24,001.10
You might be underwater in debt thinking that there’s no way out. Using the above example, this individual has $34,307.82 in debt, which might seem overwhelming. However, if you start paying down the smaller debts, you can use your monthly minimum payments that you no longer have, to carry that over and pay a larger amount on future debt payments.
With certainly we can tell you that this works, once you start paying off a couple accounts, you would establish a snowball, and your monthly payments would actually be larger numbers. For example, let’s say the $24,001.10 was a car loan, and the monthly payment was $261.10, with a proper snowball, the payments eventually will look around $831.10, therefore getting out of debt faster, and once you’re completely out of debt, this will turn into a monthly positive cash flow. Below is an image to show you how those extra payments can be used for future payments.
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