What Is The Debt Snowflake Method?
Paying off your student loans can get difficult when you’re fresh out of college. However, if you’re keen on managing your funds better to set aside leftover cash each week for payments, a debt snowflake method will help you achieve the goal.
It is a straightforward strategy of accumulating small savings which can be used to pay outstanding loan installments or other bills.
There are other strategies as well, but the snowflake method is the most-balanced of all. There are a few notable disadvantages, however, those are situation-based.
Keep reading to learn if the method will help reduce your outstanding balances.
How Does It Work?
Using the debt snowflake method, you organize all the debts from lowest to highest and build a plan to clear one debt at a time. Given it becomes a part of your monthly budget these payments are also known as planned payments. You’ll focus on saving extremely small amounts of money on a day-to-day basis. These savings will be utilized for micro-sized repayments (also called “snowflakes”) on a frequent basis.
For instance, if you find it difficult to pay $100 at the end of the month, you can try saving $25 per week and make weekly payments.
The debt snowflake method will make you realize like you are progressing with clearing your student loans as the balance tends to decline slowly rather than once a month.
It is one of the commonly advocated methods to reduce student loan debts. You will start by gathering information on all your debt accounts and listing the balances, starting from smallest to highest. Here’s a more in-depth explanation of how it works:
- List your debts - Create a list of all your debts from the lowest to the highest balance outstanding. Be sure to include every debt, be it a student loan, a mortgage, a credit card or a car loan. Don’t take note of the interest rate. The only amount that matters is the overall balance of the debt. When this has been handled move on with the next step.
- Calculate all of the minimum outstanding payments – Figure out the minimum amount due per month on each debt. This is the bare minimum target you must achieve every month, split into weekly, bi-monthly, or monthly payments.
- Start saving – Cut down daily expenses like eating out, coffee, and other small frivolous expenses that add up quickly. Instead, try eating at home to end up saving more than expected. Squeeze out funds from your daily expenses and save them to start the repayment plan.
- Clear the lowest debt first – Set up funds to cover the minimum due on all accounts but leave the debt with the lowest amount outstanding. All of the savings must be used to pay off this debt. For instance, if the due amount is $250 and you saved an extra $75, pay the extra amount on this small loan so it is closed sooner. Once done, start allocating the funds saved from closing this loan to other similar, smaller debts.
- Keep the ball rolling – This is just save and pay on loop. Clear one debt at a time and carry over the savings to repay another until you have zero balances outstanding.
Advantages and Disadvantages
The biggest advantage of the debt snowflake approach is that at the outset of the debt reduction process it presents you with a few quick victories. You can clear off the low debts quickly, sometimes within a month or two. Other notable benefits include:
- It is a comparatively easy strategy – Some repayment plans don’t need you to cut down expenses heavily. Instead, you can save the spare change daily to contribute to a larger monthly payment. For instance, if you save at least $10 a day, you have $300 available as savings.
- The psychological benefit – Small “wins” matter. With the snowflake strategy, you’ll realize that you’re in control. This helps you to stay motivated and adhere to the financial schedule.
- You become aware of your spending – Most of us don’t consider the petty expenses, often unnecessary, that we pay daily. For example, if you stop eating out and start cooking at home, you can save an enormous amount of money. The snowflake method helps you realize and think about wasting money while guiding you towards effective saving.
- Complete control – With this strategy in place, you’re in complete control of all spending and saving. The full-fledged control allows you to adapt to changing financial needs.
- No debt payoff fatigue – You’re less likely to experience fatigue as this strategy includes small savings. It is extremely achievable and manageable, so you won’t be fatigued or overwhelmed.
That being said, the snowflake method doesn’t work for everyone. This is mainly because it demands a lot of self-control, analysis, and tracking.
Here are some common problems associated with this method:
- It needs super organizational skills – If you opt for this strategy, you’ve got to be organized. This means either making payments as soon as you save enough or allocating funds as per the list so you can make monthly payments.
- Increased chances of underpayments – Since this is an option for making micro-sized payments, it’s easy to start underpaying compared to what you owe every month. This can lead to additional fees and penalties. Hence, it is important to manage a list and stay on top of all payables.
- Too much tracking – You have to track a lot of numbers. The higher your outstanding balances, the more data you need to fill in. At times, all of these due dates, minimum amounts, interest rates, and other banking terms can be overwhelming.
- Not a robust standalone plan - Some people want a simple, seamless repayment solution. If you’re worried about addressing too many things at the same time, a snowflake strategy works best with other methods like debt avalanche or a debt snowball method.
Include all possibilities and review the benefits and disadvantages of the snowflake approach when deciding between specific student loan repayment methods. Take your time to make the most-educated decision by better understanding how each method works and can benefit your repayment requirements.