Eliminating Debt Using the Snowball Method
Remember when you were a young kid and at the first site of snow you went outside to roll a snowball? Any snowball crafter knew they had to first make a smaller, tight ball and then roll it throughout the yard so that their snowball would get massive in a short period of time. Well, the debt snowball method is much the same. The idea of this system is only to make minimum payments on your debt and then focus your efforts on one single payment at a time. This prevents your efforts from being so diluted that nothing gets accomplished. Just like the snowball, your debt payoff will build momentum and before you know it you’ll be debt-free.
How the Snowball Method Works
The first step to getting your debt snowball rolling is first to put together a $1,000 cash fund for emergency purposes. After this, focus your energy on getting rid of all of your debt except for your mortgage. To do this, first write down all of your debts from smallest balance or payoff to largest. Do not take into consideration terms or interest rates unless there are two debts that have the same payoff, in which case list the highest interest rate debt before the other. Going from smallest debt to largest is best so you can stay motivated with the plan by accomplishing small goals first.
Allocate a Portion of Your Monthly Budget
The key is to set aside as much money as you can towards eliminating your debt. If you do not already have a budget, it is critical that you create one so that you know exactly how much money you can afford to set aside for your debt elimination. Your goal should be to put 35 to 55 percent towards killing your debt. If you are having a difficult time doing this, try trimming any wasteful spending you are doing such as going out to eat so that you can automatically convert that to your debt reduction payments.
Work Towards Paying Off Your First Debt
Take the debt on the top of your list and pay the absolute maximum you can until that debt is gone. You should have an easier time doing so since the debts will be smaller at first. The reason it is called the snowball effect is that now that you’ve completely paid off one debt, there’s another debt to start paying off. However, now you have one less bill that you need to make minimum payments towards. This means that the amount of money you can put into paying off the next debt on the list is a bit larger, and you’ll be able to pay it off faster. By the time you get to the end of the list, you can put all the money allocated to debt elimination towards that bill. Although it will be your largest one, you’ll be able to pay it down quickly.
What to Do After You’ve Eliminated Your Debt?
Once your debt is gone, all of the money that was going towards your debt payoff can now go towards savings and investments, as you will be living a much cheaper lifestyle. It is critical that you start saving and investing, as you do not want to fall once again into the debt-trap after just becoming debt-free. Remember that a change in mindset is essential to remaining debt-free. Do not attempt to have a lifestyle more expensive than what you can afford. Instead, live within your means and you will live a much more secure and comfortable life.