Pay Off Debt Using The Debt Snowball Method

December 12, 2009 | Posted by Brad Chaffee

Sitting on a GIANT snowball is better than sitting on a pile of debt.

Are you looking for a way to pay off debt? It can be an overwhelming ordeal, but I believe the absolute best method for paying off your debt is by using the debt snowball method. There are different variations of the debt snowball but the one I have used successfully is the one that takes into consideration the psychological aspects of this process.

Psychological aspects? Yes, this does matter. The problem some people run into while paying off debt is that they start off well, but then their effort fizzles out because they are not receiving motivation along the way. Motivation is important, which is why I like the following method the best.

The Debt Snowball Method

Make a list of all your debt except for your mortgage.

Now organize your debts in order from smallest to largest. This step is key and one that some people seem to have trouble with. It’s hard for some to grasp paying off their debt in this order as opposed to highest interest rate first.

If you were interested in doing math, then you likely would have avoided the debt trap all together, so maybe you should give something else a try. Pay off debt effectively by taking advantage of the psychological benefits that doing it this way provides.

The idea is that by paying off your smallest debt first, you are receiving a quick win and a motivational boost to continue the process. We found this to be highly beneficial.

Pay ONLY the minimum payments on ALL of your debts except for the smallest debt at the top of your list. This gives you the ability to focus on just one at a time, by allowing you to throw any and all extra income at the first debt.

Once you pay off the smallest debt, take all of the money you were throwing at that one, and start paying off the next one on your list. (minimum + disposable income + any extra money)

Furniture – Minimum: $35
Credit Card – Minimum: $75
Car Payment – Minimum: $300

Let’s say you had $60 disposable income this month. You would pay your minimum of $35 plus the $60 for a total of $95. The you decided to have a yard sale and made an additional $100.

You would be paying $195 on your furniture debt, while paying only the minimum on the remaining debts.

After you pay off the furniture debt, then you would take the $95 plus any additional money you can find, and add it to your minimum payment on the next on the list.

In my example, you would add $95 to $75, and now you are paying $170 on your credit card debt. Find some stuff to sell around your house, and that amount could be even bigger.

With each debt you pay off, the amount of money you have to pay off debt with grows and grows—hence the term debt snowball.

Do not underestimate the benefit of using this method as opposed to paying off your highest interest rate first. Paying the highest interest rate first takes longer and you do not receive any kind of motivational boost along the way.

Try this method and watch your debt snowball grow while your debt literally vanishes! Good luck!

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Brad Chaffee is the Enemy of Debt, and a regular contributor here at the Self Reliance Exchange. Learn more about Brad by reading his bio. You may also contact him here.

Categories: personal finance | Tags: debt snowball, pay off debt, self reliance | No Comments »