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Get Out of Debt with the Debt Snowball Method

There’s no wrong way to pay off debt. You may have to try several strategies to find one that sticks. One common strategy is the debt snowball method.  

What is the Debt Snowball Method?

The debt snowball method is designed to help you stay motivated while paying off your debt. You start with the smallest debt and work your way up to the largest. 

You’ve probably heard it makes more sense to pay on the debt with the highest interest rate first. What if you begin with the biggest one, feel you’re not making fast enough progress, lose steam, and quit? Does this sound familiar?

It’s important to pay your debts in a way that keeps you motivated until you’ve wiped them all out. Working from the smallest to largest debt gives you those quick wins to pump you up.

Once you’ve saved your $1,000 starter emergency fund, list all your debts (except the house) smallest to largest. Now it’s time to get rid of them with the debt snowball. 

How the Debt Snowball Works

Make minimum payments on all debts except the smallest – you’ll put as much money as you can on that one. Once paid off, take the payment and apply it to the next smallest debt, continuing to make minimum payments on the rest. Repeat that as you begin paying off your debts. You can visualize this build-up like a snowball rolling downhill. 

Here’s a quick example. Say your debt snowball looks like this: 

• Credit card 1: $500 at 13% with a monthly payment of $25.
• Credit card 2: $1,000 at 19% with a monthly payment of $50.
• Car loan: $6,000 at 4% over four years with a monthly payment of $135.
• Student loan: $15,000 at 5% over 10 years with a monthly payment of $159.

If you pay the minimums on everything and add an extra $100 to smallest credit card payment, you’ll pay it off in four months. Then you can attack the second credit card with $175 per month ($100 plus the newly freed-up $25, plus the $50 payment you’re already making). That one will be gone in five months. Now you have $310 a month ($175 plus $135) to put toward the car! At that rate, the car loan will be paid in full in 15 months!

By the time you get to the student loan, you’ll be paying $469 each month. You’ll tackle that debt in another 24 months and be debt-free. 

Becoming debt-free is a journey. When one approach doesn’t work, it’s time to switch it up. Try the debt snowball method to see if it’s the right approach for you.  

Source: Dave Ramsey