Are you trying to get into a better situation financially only to feel like you’re never going to get out of debt? Well, you’re probably experiencing the snowball effect of debt.

I mean for the most part, this is why most people are broke, and rich people are rich. The snowball effect takes over one way or another. For most people unfortunately this leads to living paycheck to paycheck and a lifetime of debt. To the contrary, if you’re well off financially it’s likely because the snowball effect has worked out in your favor.

Let’s talk about this, because it’s what we all need to understand if we want to be better off financially. And this goes for any level you’re currently at.

First off, let’s talk about people who live paycheck to paycheck because that encompasses most people (roughly 80% of the United States population).

How The Snowball Effect is Crushing You Financially

I think using a hypothetical template makes the most sense here in really understanding what’s going on in terms of this. We can use some general numbers that align with middle class Americans.

Hypothetical situation:

Family of 4, total income is 100k a year.

Combined with both parents this isn’t uncommon.

Bills total 5 grand a month, now this includes eveerything-not only debt payments but food, gas, and regular entertainment.

5 grand a month x 12 months equals 60 grand a year. Wow, so you just have 40 grand to play with! Nice.

If only it were actually like that.

In reality, you’re only bringing home 70-80% of that after paying for insurance, taxes, etc. So let’s go with 75% bring home.

This means your net pay is only 75k a year. This is what you really are living off of. So in other words, you don’t have 40 grand to play with, you have about 15 grand.

Now, what about unexpected expenses? A new roof, plumbing issues, car breaks down, etc. All of these things can easily add up…in fact, according to Angi’s home spending report, the average amount in home improvements spent in 2021 was $10,341, the average amount spent on home maintenance was $3,018, and the average amount of home emergency spending was $2,321. Add all of these up and it totals $15,680.

Wait, that’s over 15k…and we had 15k to “play with”. In other words, we literally have nothing left in this common “middle class” hypothetical scenario.

Granted, these are averages and can vary quite a bit between various households. Also averages were up on these from previous years. Either way, doesn’t matter, because even 5 or 10 grand isn’t much. We didn’t even talk about vacations or “extra” spending!!

You can easily see why the average person lives paycheck to paycheck.

Now, here is the unfortunate thing about this. Is that even while people’s income tends to go up, they don’t tend to increase their discretionary income (income after expenses) because they just tend to buy more things.

So if we used the scenario where a household makes 125-150k then typically the bills go up to match their income. Of course, this isn’t something you have to do, it’s just what most people tend to do.

How to Change the Snowball Effect in Your Favor

Now, this isn’t rocket science. You don’t have to read this article to figure this out. But unfortunately it’s something that most people tend to understand logically but just can’t seem to bring themselves to do in practice.

Even though we understand these things in the back of our mind, we need shift this from subconscious to conscious. So let’s just write these things out.

The simple answer is that we need to create more discretionary income by either increasing our income, or reducing our bills, and then give this time to snowball in the right direction.

The above hypothetical scenario we used is what most people tend to do. However, let’s think about the small percentage of the population who are financially well off.

What have they done to get there? They simply created a surplus of money coming in each month/year that gradually grew larger and larger (the snowball effect).

This is why you see people have multi-million-dollar houses, tons of money in the bank, and more money than the average person could imagine having in a lifetime.

They are simply able to leverage their money better in every way, shape, and form.

The more money you have the more business opportunities or investment opportunities you have and this can simply snowball larger and larger. A 250k home investment eventually turns into a 500k home investment that eventually turns into a million dollar home investment, etc. etc. and on it goes.

What about us regular folks?

The first thing we have to do is stop the bleeding.

Options are this:

Make more money, spend less money, and stop paying other people money in interest. That’s it.

How do we do these things?

First off, having a budget that tracks all of this should be step 1.

If you don’t understand where your money is going, then it’s going to be a lot harder to make changes.

With a budget in place we can track our spending to see where we can cut back. But most importantly, focusing on paying higher interest rate debt and lowering what we are simply throwing away each year is probably the best way to start improving our situation financially.

Can you consolidate debt in any way to stop the bleeding here? If not then at the very least setting a goal to pay off this debt could save you a lot of money.

Are there things you’re paying every month you don’t use? An old gym membership…a subscription you haven’t used in 6 months…paying extra for cable you don’t use…getting ripped off on insurance…

The bottom line is, look for ways to immediately drop expenses without having to “work” for it, or even cut back on spending. This is literally just money you’re pissing away.

Once we’ve tackled this we can start thinking about cutting our expenses or increasing our income.

Summary

Honestly, this is all basic stuff, and I’ve written about this plenty of times before in different ways saying the same thing. It really just comes down to basic math. The compounded effect of this can literally make or break us.

What about you, how has the snowball effect of money led your financial situation? Are you using it to your advantage or getting crushed by it? Let me know in the comments below!