You might have heard about something called the “debt snowball.” No, it doesn’t refer to the way interest charges on your credit cards build up like a snowstorm dumping inch after inch on our newly-cleared sidewalk. It’s actually a great way to pay off your debt with money that you are already spending toward it – it just makes your money work faster and harder.
Here’s how it works:
First, stop using your credit cards. If you have open lines of credit at places like the furniture store, stop using it. The first step to making the debt snowball work is to stop building up more debt!
Now, make a list of your bills. Start with the smallest and go to the highest. These are only bills that pertain to credit cards, revolving lines of credit, etc. Things like rent and utilities don’t go onto this list, because those are things you can’t pay down – they recur every month.
See that list? Here’s what you have to do to start the snowball rolling downhill. Look at the smallest bill you owe. You might be able to pay only the minimum payment, but try to pay more than that. In fact, try to pay it off if you possibly can during that first month. If you can’t, that’s okay – just try to add as much to the minimum as you can. In the meantime, pay the minimum on all the other balances.
Here’s what will happen: When that first debt is paid off, you will have some extra cash. Rather than spend it on something, turn around and tackle the second bill. You have been paying the minimum payment on this bill thus far. Now you will pay the minimum PLUS the amount you were paying toward your first bill – the one you just paid off. So now you are hitting the second bill hard with extra cash!
Once the second bill is paid off, then tackle the third. You will apply all the cash you were putting toward your second bill into the third. Remember, you’ve still got the extra cash from the first bill you paid off – that is going toward the third bill as well. Now is when the snowball starts to pick up speed. You’re paying a significant amount every month and your balance is dropping fast.
This debt snowball can continue until you reach the end and pay off all those nasty bills that have been eating you alive. But then what? That’s when the fun begins. If you have a car payment, tackle it with the snowball. If you have a mortgage, add it to the list. If you don’t have either of those but need a healthy savings account, put that money into a secure account every month.
The debt snowball might seem like it takes a while to get rolling – just like a real, fluffy snowball in the dead of winter – but once it gets bigger, it can roll under its own weight. That’s what you are doing when you tackle the debt snowball – you are getting out of debt, FAST.