What could you do if you didn’t have a single debt payment in the world? That sounds nice, doesn’t it? For some of you, that would free up and extra $300, $500, or maybe even $800 you wouldn’t have to be throwing at minimum payments each month. Ah, that’s the debt-free life and the road to Financial Freedom.
So how do you make this dream a reality? There are many ways of doing this, but the one I have found most successful is the debt snowball. Take control of your money instead of watching your hard-earned cash disappear month after month.
Myth: You need to pay off the debt with the highest interest rate first to get out of debt quickly.
Truth: You should knock out the smallest debt first to create momentum in your debt snowball.
What Is the Debt Snowball Method?
The debt snowball method helps you stay motivated while paying off your debt by starting with the smallest debt and working your way up to the largest.
But wait. Doesn’t it make sense mathematically to pay on the debt with the highest interest rate first? Wouldn’t that save you the most money?
Maybe. But if you begin with the biggest one, you might think you’re not making fast enough progress, lose steam, and quit before you even get close to finishing. It’s important to pay your debts in a way that keeps you motivated until you’ve wiped them all out. Those quick wins will pump you up and push you further to eliminating all your debts!
And that happens when you start with the smallest debt. List all your debts (except the house) smallest to largest. Now it’s time to get rid of them ASAP with the debt snowball.
Here’s How the Debt Snowball Works
Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all debts except the smallest—throw as much money as you can at that one. Once that debt is gone, take its payment and apply it to the next smallest debt while continuing to make minimum payments on the rest.
Step 3: Repeat this method as you smash your way through debt. The more you pay off, the more your freed-up money grows—like a snowball rolling downhill.
- Credit card 1: $1,000 at 10% with a monthly payment of $100
- Credit card 2: $1,000 at 15% with a monthly payment of $150
- Car loan: $8,750 at 5% over four years with a monthly payment of $200
- Student loan: $15,000 at 15% over 10 years with a monthly payment of $250
If you pay the minimums on everything and add an extra $100-$200 to the smallest payment, you’ll pay it off in much quicker. Then you can attack the second debt to of $150 per month (Plus the newly freed-up $300, totaling $450). That one will be gone in very quickly. Now you have $450 a month ($100 plus $150 plus the $200) to put toward the car! At that rate, the car loan will be gone in nearly 3 times faster than it should have been! By the time you get to the student loan, you’ll be paying $900 on it each month! You’ll wave goodbye to the university or college in another 24 months and be totally out of debt.
That’s what happens when you have focused intensity and start with your smallest debt—it leads to big results!
Remember; Start now & Compound!