Pay Off Your Debts Using the Snowball Method
Posted on 10. Feb, 2010 by Jeremy Reis in Personal Finance
Dave Ramsey is the best known proponent of a debt payoff method called the “snowball method.” The snowball method is a way for you to pay off all of your debts: credit cards, car loans, student loans, house mortgage, and other debts.
The first step to creating a debt snowball is to list all of your debts with the balance owed and the minimum payment. Next, determine the total amount of money you can pay towards your debt each month. This number must be more than the total of your minimum payments, otherwise, you will never get out of debt!
Re-order your debts with the lowest balance first. If you have two debts with similar balances, list the higher interest rate first. Now, pay the minimum on all of your debts except for the first debt – apply any extra cash you have to that balance to pay it down first. After you have paid off the first debt, apply everything you were paying on that debt + the minimum payment on the next debt and pay it off (thus the “snowball” effect on your payments).
Why do we list the debts with the lowest first and not the highest interest rate first? Psychologically, it’s better for you to have some “wins” on your way to becoming debt free. As you pay off each debt, it is a win for you and you will begin to see progress.
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