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How to Do a Debt Snowball (A Step by Step Guide)

The debt snowball. It sounds like winter but is perfect for your spring (financial) cleaning. Debt might not be fun to talk about but, aside from just making you want to avoid checking the mail, it causes a ton of unwanted stress and anxiety. When it comes to paying off debt, you might want to pay off the highest balance first. Or you may want to tackle the one with the craziest interest rate, which could save you cash in the end. Well, that’s great, but for many people – doesn’t work. If it were that easy, there’d be no debt!

The snowball method of paying off debt is all about taking baby steps and building up your payments over time, gaining more and more traction until you reach the final goal. Once you get organized, it’s a lot less stressful than other methods because you end up with a strict – but manageable – plan to stick to, and one that allows you to SEE the results quickly, rather than just looking at numbers decrease in small amounts each month.

How to Do a Debt Snowball
Photo credit: simpleinsomnia via Visual hunt / CC BY

How to Do a Debt Snowball (in 5 Simple Steps):

1. List out all your loans and order them from smallest balance to largest. If you have a few that are about the same, you should make the one with the highest interest rate a priority, but aside from that, it’s all about going smallest to largest.

2. Add up the minimum payments for all debts, so that you can pay all minimums each month (thus not incurring late fees and more debt while paying off the first one!).

3. Now that you’ve added those up, calculate how much beyond the minimum you can commit to paying off the smallest debt. For example, if the minimum payment is $20, see if there’s room in your budget to pay $50 while still paying off the others.

4. Once the first debt is paid off, continue on to #2 on your list. Here you want to use the amount you used to pay the first payment, in addition to the minimum payment. So if you paid $50 monthly on the first debt, plus a minimum of $20 to cover that second debt on your list, you’d now pay $70 each month on that one.

5. Repeat until all debts are paid. If expenses and obstacles arise, reevaluate. The whole point of this method is that it’s doable, and you’re making progress each time!

So what are the benefits to paying off debt this way? People who have different sources of debt can have a plan that doesn’t leave to total overwhelm. It’s also good for those motivated by results… You don’t have a bunch of debts that go on and on, because you know that they’re getting paid off one by one AND you’re still managing the others while doing it.

It’s important to note that the reason a lot of people are in debt are because, yeah, they don’t have too much extra money. So the key to making this system work is looking at your finances (go through those bank statements and see where exactly the money is going) and cutting back on what’s not absolutely necessary. Often little purchases like coffee shops and add-ons at the grocery store make a bigger difference than you think. See what you can cut out to get the (snow)ball rolling!

You’ll ideally be eventually debt-free, meaning that you’ll have this chunk of money at the end that would normally have been allocated to such bills. You’ll finally be in a place to save the money or invest in something important, and it won’t set you back – You’ll know exactly how much you can afford to save or spend.

For more details, we recommend Dave Ramsey as a solid financial-advice resource!  xx

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