Debt Snowball
A shocking 80% of all Americans are living with debt hanging over their heads and feeling trapped because of it. But, people are starting to wake up and realize that there is another way of living. One that doesn’t include debt collectors and anxiety. A way of living debt-free. Getting there isn’t easy though and there are a lot of different methods for getting out of debt. There is one that has risen above the rest in the last couple of decades, the debt snowball.
What is the Debt Snowball?
The debt snowball is a method for paying off debt that has gained popularity in recent years thanks to celebrities like Dave Ramsey promoting it. The debt snowball looks at debt in a more emotional sense rather than just pure math. This is what millions of people who have done the debt snowball method claim as the reason for their success when other methods of debt repayment have failed.
How does the Debt Snowball Work?
In other methods of debt repayment, you are taught to start by paying off the debt with the highest interest rate. But, this could mean that you are repaying one debt for years without really making any progress. Which leads to feeling worse about your debt, and sometimes just giving up completely. The debt snowball takes a different approach by having you start with your smallest debt first.
Begin by first making your minimum payments for all of your debts. The last thing you want is to get into trouble for not making those payments. After you’ve made your minimum payments any other money you have leftover goes towards paying off your smallest debt and you continue doing this until that smallest debt is paid off. Once you’ve paid it off then it’s time for a small celebration before you start on the next debt.
Once you move on to paying off your next debt you will still make the minimum payments for everything, and pay off what is now your new smallest debt. As you repeat this process you’ll start to see your snowball building up. When you knock out that smallest debt, the amount you’ll be able to contribute towards the next debt will be higher because you won’t have that minimum payment anymore. This will also allow the rate you repay your debts to increase as you go, making your snowball get bigger.
How Do I Get Started?
Getting started with the debt snowball couldn’t be easier. Make a list of all your debts and how much you owe for them. Ignore interest rates, who owns the debt…ignore everything except how much money is involved. Write this list in order of smallest to largest. This doesn’t include your mortgage, though once you’ve paid off all of your debt and you’ve got at least a 6-month emergency fund you can start paying off your mortgage faster than you would have before.
Once you have your list make yourself a budget. Most people budget 1 month at a time, but if you find that budgeting from paycheck to paycheck works better for you then that’s ok too. The important thing to do is to give all of your money a job. This is how you know how much money you will have for paying off debts. Part of that calculation will include the minimum payments for your debts. Whatever money you have left after paying bills, buying food, and making minimum debt payments is what you put towards that smallest debt.
