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Once you’ve cut up your credit cards and tucked away $1000 for your mini emergency fund, you’re ready to start your debt snowball! Many financial experts dub this method “The Debt Snowball” because in the same way that a snowball rolling down hills gets bigger and rolls faster, the money available to pay off your debt begins to accumulate as each debt is paid. (Honestly, I think this step excited me the most because the more debt I crossed off my list the more determined I became.) So my advice to you is exactly what I did:
List out your debts from smallest to largest, (minus your home mortgage because that will come in a later step). Concentrate on the smallest balance first.* Once that debt is paid, apply that money to the next debt. Since you have more money to apply to this next debt, it will help you pay it off quicker. When that debt is paid, move on to the next debt, continuing to apply the money from the old debts to the next one. Don’t worry about which debt has the highest interest rate unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first.
Let me show you what I mean with this sample debt snowball list:
| $ 8.23 | Kohl’s | |
| $ 11.90 | Banana Republic | |
| $ 45.59 | Express | |
| $ 508.74 | Helzberg’s | |
| $ 692.29 | Wells Fargo Visa | |
| $ 700.00 | Chase | |
| $ 1,379.34 | Wells Fargo MC | |
| $ 2,000.00 | Chase | |
| $ 28,711.00 | Toyota Financial | |
| $ 34,567.00 | Sallie Mae | |
If your paycheck is $1500 every other week and you budget $67 towards your debt snowball, you will payoff Kohl’s, Banana Republic, and Express at one time and have $1.28 to put towards Helzberg’s. Now your debt snowball list looks a little lighter:
| $ 8.23 | Kohl’s | |
| $ 11.90 | Banana Republic | |
| $ 45.59 | Express | |
| $ 508.74 | Helzberg’s Jewelry | |
| $ 692.29 | Wells Fargo Visa | |
| $ 700.00 | Chase | |
| $ 1,379.34 | Wells Fargo MC | |
| $ 2,000.00 | Chase | |
| $ 28,711.00 | Toyota Financial | |
| $ 34,567.00 | Sallie Mae | |
But let’s say your Chase credit card actually had the lowest interest rate and you decided to erase that debt first. Now instead of paying off 3 debts at one time, it would take you 30 pay periods to cross just one debt off your list!
“The point of the debt snowball is simply this: You need some quick wins in order to stay pumped up about getting out of debt. Paying off debt is not always about math. It’s about motivation. Personal finance is 20% head knowledge and 80% behavior. When you start knocking off the easier debts, you will see results and stay motivated to dump your debt.” – Dave Ramsey
TODAY’S BITE-SIZED TO-DO: List out your debts from smallest to largest. Take the money you have budgeted each month and start building traction with your debt snowball, applying the money from the old debts to the next one. Start throwing every extra dollar towards that first debt. Then the second. Then the third. Continue in this manner until you’ve paid off all debts. On average, this step will take you between 24 to 36 months, so be patient.
In the next post in this series, we’ll come back to that mini emergency fund and grow it into 3-6 months of living expenses.
In case you need a reminder, here are the first three posts in the series . . .
Step 1: How I paid off $93,000 in less than 3 years
Step 2: Budgeting
Step 3: Save $1000
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