Debt

What is a debt snowball?

Many times when people want to pay off their debt, they take on more debt. That doesn’t seem to make much sense, but you will find that people often take out “debt consolidation loans” or use equity in their homes or cars. Some people apply for 0% interest rate credit cards and make a balance transfer from their higher interest, high balance cards.

One way to pay off debt without going into more debt is called a debt snowball. This is a method endorsed by Dave Ramsey in his Financial Peace University and it’s the way my husband and I paid off our debt early on in our marriage. In order for this method to work for you, you must be committed to not using your credit cards, to paying cash for everyday expenses and making sure you throw all available funds towards your debts. It is also super important that you create a budget–even if it’s a simple one – because it will allow you to allocate money towards debt and see areas that you can cut back on and put toward paying down those balances faster and easier.

The first step to creating a debt snowball is to write out a list of all of your existing debts. A debt is any existing loan or credit card balance that you may have. We’ll ignore your mortgage, if you have one, for this exercise. You do want to include your car payment in this snowball. I suggest writing out the balance, the interest rate, the minimum payment and the due date next to the debt.

Next, look at your budget and figure out how much you are currently paying toward your debt. If you are only making minimum payments on all your debts, that’s okay, but you will want to look at your budget and see if there’s any areas you can cut back on. You really want to attack your debt and get it paid off as quickly as possible. By putting as much money as you can toward your debt, and paying down smaller balances, you will begin to create momentum and get your debt under control and paid off much sooner than if you just pay minimum payments.

Lastly, you want to start paying on your debts. You will start by putting as much money as you can toward the debt with the lowest balance, while still making the minimums on all your other debts.  This is counter to the more conservative practice of paying off the highest interest debt first because–remember–you want to build momentum!

Paying towards high-interest, large debts doesn’t yield much satisfaction until you pay it off; by focusing on the smallest debt first you get some “quick wins.” Once you have paid off the balance for the smallest debt, you will take the payment you were making on that debt and combine it with the minimum payment for the next lowest balance to get that one paid off, and so on and so forth until all your debts are paid off.

A debt snowball is a great way to pay off debt without acquiring more debt. They allow you to achieve small wins, which eventually propel you to make much bigger progress on your financial goals.

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