What We Like About The Snowball Method of Paying Down Debt

If the goal is debt reduction, paying off debts in order of the smallest amount due to the largest amount due—gaining momentum as each balance is paid off—can make sense for some people. Once the smallest debt is paid in full, apply the amount that was being paid on that to the next largest debt, and so on. The amount being paid on each of the remaining debts will increase, just like a snowball gets bigger with each layer of snow added.

Building the Snowball
It’s all about changing behavior. Getting rid of the smallest debt first can work wonders because it gives a psychological boost. Try paying down the largest debt first, and it can feel like throwing a pebble into an ocean.
The numbers on that large debt will start to decrease, for sure, but it’s probably not going to give the same feeling of getting rid of the smallest debt first. Paying that small debt first is meeting a goal, which can be empowering.
When it’s time to take on the Big One (the largest debt), there will be more freed-up cash, creating a more stable financial situation to pay it off.

A Word about Paying off High-interest Debt First
But wouldn’t it make more sense to first tackle the debt that comes with higher interest rates and large balances?

While that makes sense from a financial perspective because it means paying less interest over the life of the loans, statistics suggest a different solution. Psychologically, getting rid of the smallest debts first often provides the momentum needed to pay off debt sooner.
A study by Northwestern University’s Kellogg School of Management found that “consumers who tackle small balances first are more likely to eliminate their overall debt” than trying to pay off high-interest-rate balances first.
Even the Harvard Business Review came to the same conclusion. Their research suggests that people are more motivated to get out of debt not only by concentrating on one account but also by beginning with the smallest account.

Making Minimum Payments Doesn’t Equal Minimum Payoff Time
Even if the minimum payments on a person’s credit cards are somewhat manageable, they can be a trap. It’s more than likely that paying only the minimum on the debt will mean paying on it for years to come—and paying substantially more money than the amount originally borrowed. That’s because most credit card companies make their money by charging high interest rates and compounding interest on balances not paid in full each billing cycle.

The Snowball Plan, Step By Step
Following these steps could result in shrinking a debt load, giving someone who is feeling hopeless about their debt a little room to breathe.
1. List all debts from smallest to largest. List them by the total amount owed, not the interest rates. If two debts have similar totals, place the debt with the higher interest rate first.
2. Continue to pay the minimum payment on every debt.
3. Decide how much extra can be paid toward the smallest debt (the first debt on the list).
4. Pay the minimum payment on that smallest debt, but also add in the extra amount from step three. Repeat until the debt is paid off.
5. Once that smallest debt is paid off, add the amount that was being paid on it as an extra amount to the next smallest debt on the list. Now that second debt is on its way to being paid in full.
6. Repeat the steps until all debts are paid off.
A Word About Principal Reduction
It’s a good idea to find out how lenders apply extra payments to a debt (they don’t all do it the same way) before starting this process. Some debt companies that handle mortgages, school loans, or car payments need instruction about how any extra money should be applied (to principal or interest). Credit card companies, though, typically apply the entire payment to the current billing cycle.

Perks of the Snowball Method
The psychological boost from entirely paying off one debt is the main idea behind the snowball method. Seeing the results—sometimes quickly, if the smallest debt is very small—can be a great motivator to press on and continue paying off debt. With fewer debt obligations every month, it’s likely debt will be less of an emotional burden.
Of course, the flip side is that if the smallest debts are being tackled first, high-interest debts may be accruing interest for quite a while. Ultimately, the snowball method may be the most effective psychologically, but it isn’t the most cost effective.

Alternatives to the Snowball Method
There are other ways to pay off debt. Here are just two:

The Avalanche Method
Also known as the “debt-stacking” method, the avalanche method works in contrast to the snowball method. Saving money on high-interest rates is the goal. This method is not as simple as paying off the smallest debt first.

It involves making a list of debts in order of interest rates, with the highest interest rate being first on the list. If some debts have variable interest rates, they might need to be moved around in the list from time to time as their rates change. This method’s focus is on paying down the debt with the highest interest rate with as many extra payments as possible.

The Debt Snowflake Method
The debt snowflake method involves finding extra income through a part-time job or selling items no longer needed or wanted, and sprinkling that extra cash on debt obligations every day. Those extra payments could go a long way to helping someone become debt-free.

The Takeaway
Merging all debt owed into one unsecured personal loan could make it easier to pay down that debt each month. Taking out a personal loan to consolidate multiple high-interest credit card debts means just one payment per month, streamlining the debt repayment process.

If you’re considering this strategy, an unsecured personal loan from SoFi might be right for you. Checking your rate takes just two minutes and you may qualify for rates that will help you get out of debt sooner compared to credit card rates. SoFi personal loans have no fees and low fixed rates.

Ways to Build Wealth at Any Age

Ways to Build Wealth at Any Age

Whether you want a worry-free retirement or a custom-built home, your financial goals are worthy investments. But they won’t come without careful planning.

When it comes to people’s top financial goals for 2021, Country Financial’s 2020 security index report found that controlling spending, saving for an emergency, paying down credit card debt or student loan debt, and saving for retirement were among top goals. Purchase-oriented goals—such as buying a car and purchasing a home—also made the list.

There are some tried and true ways to save money and build wealth at any age—whether you use those funds for immediate purchases, long-term goals such as retirement, or estate planning for after you’re gone.
The key is to start now, rather than wait until “the right time.” Here are some simple actions you can take today to get started building wealth and cash flow for tomorrow.

Set Short- and Long-Term Goals
The first step in building wealth is to set short and long-term goals you can revisit throughout your journey.
Short-term goals focus on achieving more immediate results, such as funding next summer’s trip or buying a new car. In contrast, long-term goals might require several years or more of preparation. For example, you may want to collect enough to pay off your mortgage or send your kid to college. Creating realistic goals at the start gives you direction, so make them as specific as possible.

Create a Budget
Once you know your goals, drafting a monthly budget becomes more manageable. Document up to three months’ worth of expenses and then break the list down into fixed costs, variable costs, necessary costs and discretionary costs. You can’t stop paying your utilities, but you will likely find places to save in your discretionary category (think restaurant meals, or entertainment expenses). Dedicate a portion of that discretionary spending to your goal’s fund regularly.
Taking stock of your financial situation gives you a clearer understanding of where you are, where you’re going to go, and how you’re going to get there.

Pay Off Deb
To dedicate more money toward building wealth and saving for your goals, you’ll likely need to pay off some debt first. You can use your discretionary income as a tool for minimizing your debt load. If you have multiple debts, consider using a debt repayment method, such as the avalanche method, the snowball method, reaching out to a debt settlement or debt consolidation company to accelerate the process.

Debt Repayment: The Avalanche Method
The avalanche method prioritizes high-interest debts by ranking the interest rates from greatest to least. Then, regularly pay the minimum on each of your debts, and put any leftover funds towards the one with the highest interest rate. Once you pay that off, continue on to the second-highest debt. Follow that pattern to minimize the interest you’re paying as you become debt-free.

Debt Repayment: Snowball Method
Alternatively, the snowball method is another debt repayment strategy. It’s essentially the opposite of the avalanche approach. List your debts from smallest principal to largest, ignoring the interest rates. Then, regularly dedicate enough funds to each to avoid penalties, and put any extra money toward the smallest debt.
After the smallest debt is paid, redirect your attention to the next largest debt, and so on. As the number of individual debts shrink, you’ll have more money to apply towards the larger debts. You may still have interests to worry about but picking off the debts one by one can impart a sense of forward movement and accomplishment.

Debt Settlement
With the Debt settlement method your credit will be affected because in order to settle debt the account need to be delinquent. This method is not right for everyone but if you are facing a mounting load of unmanageable amount of debt Debt Settlement may be the right option.

Debt Consolidation
Debt Consolidation is a method where a company will take all of your accounts under one umbrella, close them all, and pay them off with a reduced interest rate over a period of 5 years or so. This method is typically much more expensive than a debt settlement program.

Begin Investing
If you haven’t already, find out what if any employer-sponsored retirement savings plans are available to you, such as a 401(k). These qualified retirement plans offer tax advantages and typically allow you to direct a portion of your paycheck to your account, putting your savings on autopilot. If your workplace does not offer any retirement accounts, consider opening an IRA or a brokerage account to build an investment portfolio.
Generally, investing for retirement when you’re young means you can take on more risks. While a diversified portfolio is a standard strategy, younger investors might have a portfolio that’s heavier on equities early, since they may help you capitalize on long-term growth. As you get older and closer to retirement, your risk profile may change and your portfolio will need a rebalancing to incorporate more fixed-income investments.

How to Increase Your Income and Save More
You might be getting by on your current income, but if you had the chance to boost it, wouldn’t you? With an extra-positive cash flow, you could tackle debt, save more, and achieve your goals sooner. Here are a few ways to make that happen.

Ask for a Raise
Asking for a salary increase is one solution for improving your cash flow. All it takes is one good conversation, a positive work record—and a bit of courage and confidence. Speak to your peers and read up on how to conduct yourself when asking. Going in with a plan will save you anxiety and help you get your points across clearly.

Seek Other Investment Opportunities
When investment opportunities pop up, take advantage of the ones that speak to you whenever possible. Some may be easier to break into, like real estate, one of the world’s largest asset classes. Other reliable options include gold and silver, which you can invest in physically or through ETFs. For investors willing to take on a higher-risk opportunity, investing in startups may be appealing. It all comes down to what investment will best serve your personal short- and long-term goals.

Start a Side Gig
Additional work is also great to bulk up your resume and create new connections. It seems like everyone is starting up a side hustle these days. From online shops to freelancing, the opportunities are endless. All you have to do is determine your marketable skills and how to advertise them. There might be local opportunities, or you can create a profile online with related websites like Etsy or Hourly Nerd.

Cut Expenses
Sometimes it’s not about finding new currents of money, but about creating a larger pool with the money already coming in. Take a second pass at your list of discretionary expenses to pinpoint a few more areas you could cut back on without feeling the impact in your day-to-day life.
One good example: Automatically renewed subscriptions for streaming services and local businesses, like gyms, are convenient. But think about how frequently you use the service. If the answer is “not often,” you’re not getting your money’s worth—and you may want to negotiate a lower fee, or cut the subscription altogether.

How to Build Wealth at Every Stage of Life
While it’s good to have a general strategy in place for building wealth and increasing cash flow, different stages in your life may require you to focus on different things. Taking advantage of the opportunities each decade brings you will help you financially adjust and build a stable lifestyle.

In Your 20s
You may be right out of school and trying to navigate the job market, but don’t wait to start working towards your long-term financial goals. Future You will only be prepared if Current You starts planning now.

Create an Emergency Fund
Generally, an emergency fund should include about three to six months’ worth of living expenses. Although that sounds like a lot, you’ll be grateful for the cushion if you should lose your job, or crash your car, or have a medical emergency. Unexpected things happen all the time, and an emergency fund will protect you while you get things back up and running. It will also keep you from having to touch other savings accounts, like a retirement account.

Eliminate High-Interest Debt
Your student loans aren’t going anywhere, so pay them off as soon as possible. The same goes for any other high-interest debt you might have incurred, such as with a credit card. Paying off growing interest rates will bog down your ability to save.
However, don’t be afraid to use your credit cards. Your 20s are the perfect time to build credit, which will be vital to certain goals, like purchasing a house. Use them strategically and pay them off immediately to build an upstanding credit history.

In Your 30s
Your 30s may bring some stability into your life, whether it’s regular work, a partner, and/or kids. However, the costs you’re facing are likely growing with you. Focus on money moves that will benefit you long-term.

Plan for College Expenses
If you have children, saving for their education is a big step. Use opportunities like a 529 account to help provide the funding. A 529 plan is a tax-advantaged savings plan you can use to pay for future tuition and related costs. That said, many people who’ve been there, and done that, may advise against prioritizing your kids’ education over your retirement.

Pad the Nest Egg
By some popular estimates, by age 30 you should have at least one year’s worth of your annual salary saved for your retirement—and twice that by 35. Incrementally increasing the amount you put towards your savings will help boost that number as well.

In Your 40s and Beyond
By 40, conventional wisdom holds that you should be well on your way to a growing nest egg with three times your annual salary saved up. At this stage, you may also have other assets to your name, such as property. If you have kids, they might be nearing college age, and retirement might not seem quite as far away as it once did.

Protect Your Wealth
It’s always smart to protect your assets and yourself. Make sure you have insurance covering both your estate and yourself (through health and life insurance). Insurance can take a burden off of your family’s shoulders in case anything happens to you.

Capitalize on Make-Up Contributions
A make-up, or catch-up, contribution, is an additional payment that anyone over age 50 can make to their 401(k) or IRAs retirement savings account. If you’re in a financial position to contribute these extra funds, it can help bulk up those savings to help prepare for retirement.
For 2021, the maximum allowable catch-up contribution to 401(k) plans is $6,500. The IRA annual contribution limit for 2021 is $6,000, with those 50 and above allowed to contribute another $1,000 a year. Total, anyone over 50 can put $7,000 into their IRA annually.

Wait to Take Social Security
Did you know you could receive a higher Social Security benefit if you wait to claim your benefits? Those who hold off collecting Social Security until age 67 get 108% of their benefits, and those who wait until the age of 70 can receive 132% of their monthly benefit. On the other hand, if you begin taking benefits early, at age 62, you’ll receive 25% less in monthly benefits.

Shift Your Asset Allocation
Investors should periodically revisit their portfolio and reassess their investments and risk level. As you get closer to retirement, you may decide to allocate a larger part of your portfolio to safer choices like bonds and other fixed-income.

The Takeaway
Building wealth at any age starts with a frank look at your current income and expenditures, a detailed list of short-term and long-range goals—and a little follow-through based on where you are in life.

It’s never too late to start building your wealth. SoFi Invest® can help put you on the right path to begin saving for your future. With no SoFi management fees, you can focus on building the portfolio fit to your investment style. Whether you prefer being an active investor or would rather automate the process, there’s an option for you.