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What is the best way to pay off debt? It might seem logical to start with the debt that has the highest interest rate, right? Although that seems good on paper, it does not take into consideration the emotions behind changing your money mindset and paying off your debt for good. The debt snowball method is the best choice, especially if you have tried to pay off debt in the past but had trouble keeping your momentum.
So what exactly is the debt snowball?
Make a list of all of your debts with the total owed and the minimum payments and put them in order from the smallest debt to the largest. You are going to focus paying your smallest debt first and then moving on to the next debt.
Take all of your extra money and throw it at your debt – this is your snowball. Then take the minimum payment of the debt you just paid off, roll it into your debt snowball, and start on your second debt. If you are not sure where you are going to get the money to start your debt snowball, make sure you read how to get started. It will walk you through the steps of setting up your budget!
It is important that you only pay extra on the debt you are working on paying off, which is going to be the debt with the smallest balance. Only pay the minimum payments on the rest of your debts.
Planning Your Debt Snowball
Here’s an example of what a debt snowball would look like:
- Credit Card: $3,000 – minimum payment $75
- Student Loan: $10,000 – minimum payment $300
- Personal Loan: $1,000 – minimum payment $25
- Car Loan: $5,000 – minimum payment $100
Since your personal loan is the smallest, you are going to put this debt first in your snowball. You know after doing your monthly budget that you have an extra $500 each month to use as your snowball. You are going to pay the minimum payment of $25, plus your $500 snowball and pay this debt off in just under two months.
Now you have a $525 snowball (original $500 snowball + the $25 minimum payment from the loan you just paid off). You are going to move on to your next smallest debt, your credit card, and start tackling this debt by paying $600 ($525 snowball + $75 minimum payment) and have it gone in roughly 4 months.
Now you are building momentum and seeing progress!
Keep in mind this is just an example and does not factor in interest. In this example, you would eliminate your first debt in about two months and your second debt four months later. So, in about 6 months you will have kicked two debts to the curb. Now you are ready to tackle your third debt with a $700 snowball!
Using the debt snowball method is huge because not only do you pay off your debt, but you also start to change your money mindset. It’s modifying your BEHAVIOR towards money. If you are focused on paying off a larger debt first you’ll only see your progress on paper. All of your debts will still be lingering around as you chip away at your balances. With the debt snowball method, you are actually eliminating debts and building your motivation to stay in the game because once that debt is gone it is GONE!
Where is your family at in your journey to pay off debt? What has been your biggest challenge? What is your biggest celebration?