Pay Off Debt with the Debt Snowball Plan

Pay Off Debt with the Debt Snowball Plan

Here and there, we all hear of people talking about paying off debt with the “Debt Snowball Plan” but many people may not know exactly what that means. The myth that you need to pay off the debt with the highest interest rate first to get out of debt quickly is what most people have been taught. But truth be told, using the “Debt Snowball Plan” you should really knock out the smallest debt first to create momentum in paying off your debt. With momentum, you stay motivated, you see results faster, and most importantly, you don’t get discouraged!

What Is the Debt Snowball Plan?

So what is the debt snowball method anyway? It’s a plan designed to help you stay motivated to pay off your debt by starting with the smallest one and working your way up.

Mathematically, it makes sense to pay on the debt with the highest interest rate first. After all, doesn’t that save you the most money?

Maybe, but it’s more important to pay your debts in a way that keeps you motivated to keep going until you’ve wiped them all out. If you begin with the biggest one, you might think you’re not making fast enough progress, lose steam, and not finish the job.

It’s better to get quick wins that pump you up. Those wins happen when you start with the smallest debt. Once you’ve saved your $1,000 starter emergency fund, list all your debts (except the house) smallest to largest. Now it’s time to get rid of them ASAP with the debt snowball.

How the Debt Snowball Works

Make minimum payments on all the debts except the smallest, and throw as much money as you can on it. Once that debt is gone, take its payment and apply it to the next smallest debt. Repeat that as you plow your way through them. The more you pay off, the more your freed-up money grows—like a snowball rolling downhill.

Here’s a quick example. Say your debt snowball looks like this:

  • Credit card 1: $500 at 13% with a monthly payment of $25.
  • Credit card 2: $1,000 at 19% with a monthly payment of $50.
  • Car loan: $6,000 at 4% over four years with a monthly payment of $135.
  • Student loan: $15,000 at 5% over 10 years with a monthly payment of $159.

If you pay the minimums on everything and add an extra $100 to the smallest credit card payment, you’ll pay it off in five months. Then you can attack the second credit card to the tune of $175 per month ($100 plus the newly-freed-up $25, plus the $50 payment you’re already making). That one will also be gone in five months. Now you have $310 a month ($175 plus $135) to put toward the car! At that rate, the auto loan will hit the road in 15 months!

By the time you get to the student loan, you’ll be paying $469 on it each month! You’ll wave bye-bye to Sallie Mae in a couple of years and be totally out of debt. That’s what happens when you have focused intensity and start with your smallest debt—it leads to a big result!

We’ve all been down this road……..allow me to correct myself, most of us are still driving down this same road. Debt sucks! There’s no other way to put it. One of the key factors in getting successfully out of debt is simply staying consistent and not losing hope. Student loans, credit cards, miscellaneous expenses can all add up quickly. With a set income, it can be devastating and down right discouraging at times. But hang in there, know that you’re not the only one who is going through this, and use tricks such as the Debt Snowball Plan to help you. You can do it guys!!

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