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Snowball: How to Use This Technique to Get Out of Debt Quickly


You have a fault? Do not be ashamed that you are not alone. According to the 2018 National Financial Inclusion Survey, 6 in 10 adults have formal credit. However, only 35% of people have a budget, and 58% of them do it mentally.

Having debt isn’t bad as it is well managed and can help us access goods like a home or a business more easily. However, before accessing a loan, it is important to know your solvency.

Snowball: How to Use This Technique to Get Out of Debt Quickly
Snowball: How to Use This Technique to Get Out of Debt Quickly

Citibanamex gives us this formula to know our debt capacity. This is the maximum capital that we can borrow without running the risk of the loan not being paid:

Credit Capacity = (monthly income – fixed expenses) x 0.35

According to Juan Luis Ordaz, director of Citibanamex Financial Education, what we can use to pay loans on a monthly basis should not be more than 35% of personal or family income, with fixed costs (the expenses incurred month after month) For example, this is required for rent or maintenance payments, electricity, water, tuition, pantry, credit payments, etc.) For a person who earns 10,000 pesos and whose fixed costs are 6,000, their debt capacity is USD 1,400 pesos ( $ 10,000 to $ 6,000 = $ 4,000 * $ 0.35).

Image: Depositphotos.com

The snowball technique

One technique that has become popular is that of snowball. It is a method that can help you stop all types of debt, but it requires certain order and discipline. In short, it tries to repay the smallest loan you have as quickly as possible, gradually increasing the money you provide to pay off your debts.

How does it work?

  1. Make a list of all of your debts. Include the amount you owe for each one, the interest you pay each month, and the minimum monthly payment you need to pay for each one. You can do this in a computer spreadsheet or notebook.
  2. Once you have this information, add the total of all your debts. Do not be sad! Knowing where you really stand and that you can afford it is important.
  3. Sort out your debts. Register your debts in the following order of priority: First come those that affect basic needs, such as: B. Rent, electricity, water, etc. In the next position, the most expensive loans, you can identify them as they have the highest interest rate. The following debts rank them from lowest to highest debt amount.
  4. It starts with a guilt. With this method, you will pay off all of your debts. We recommend that you make the minimum payment in any case, except for the debts you put first, paying a little more than the minimum payment as much as you can. Do this until you have paid off the highest priority debt. It is comforting to see the total amount you owe decrease.
  5. Let’s go to the next one. Once you’ve paid your first debt (more than the minimum and everyone else’s minimum), let’s move on to the second. How are you going to pay for it? The amount you paid for your first (all) debt should be allocated to the second. So you pay the second in much less time and you keep paying the minimum in the remaining debts.
  6. The amount you have grows like a snowball. Since you have paid the first and second debts, it is important to reassign the amounts you assigned them to your third debt, if you had them, and otherwise you will continue to pay the minimum. Follow these steps until you are out of debt. As you can see, with the highest priority paying off your debts, you will have more resources to pay off your subsequent debts.

This method helps us get out of the smallest debt quickly and releases a small cash flow to pay off the next, and this creates the “snowball” effect.

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