The Snowball Method

The snowball method is a strategy for reducing or eliminating financial obligations by settling your smallest financing first, then moving on to your next smallest financing. Over time, you’ll gain momentum as each financing is settled, just like a small snowball that adds to its size by collecting more snow as it rolls forward.

The snowball method works by focusing all your attention on your smallest financial obligation. Unlike other financial obligation payment strategies, the snowball method is only concerned with the size of your financing balance, not the rates on financing. For example, let’s say you have 3 financings: a home financing with AED 750,000 remaining at 5% rate on financing, a school fees financing of AED 50,000 at a 10% rate on financing, and an AED 30,000 car financing at a 4% rate on financing. The snowball method says you should settle the smallest financial obligation (the car financing) first, even though it has the lowest (i.e., best) rate on financing.

The next step in the snowball method would be to take that same amount you just paid for your smallest financing (the car financing) and apply it to the next smallest financing (the school fees financing). Let’s break this down:

5 YEARS

AED 30,000 car financing (Minimum payment of AED 522)

10 YEARS

AED 50,000 studnet financing (Minimum payment of AED 661)

25 YEARS

AED 750,000 home financing (Minimum payment of AED 4,384)

For Example:

Step 1: Settle the smallest financial obligation – your car financing – as quickly as possible.

Step 2: Once the financing is settled, move on to the next smallest financial obligation, your school financing.

Step 3: Take the minimum payment of AED 552 that you previously used to put toward the car financing and add it into the minimum payment for the student financing of AED 661, for a monthly payment of AED 1,213.

Step 4: Then, once you’ve settled the school fees financing, repeat this process of adding the minimum payments from that financing (AED 1,213) to the home financing to help settle that financing sooner.

The snowball method’s most obvious benefit is that it can help you settle financial obligations faster. Another advantage of the snowball method is the momentum it generates for you as you settle your financial obligation. Other ways of reducing financial obligations might leave you feeling discouraged, but since the snowball method starts with settling the smallest, most manageable financial obligation, it motivates you to keep pushing by showing you that freedom from financial obligations is well within your reach.