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What could you do if you didn’t have a single debt payment in the world? That’s right—no student loans, car payments or credit card bills! For some of you, that would free up an extra $300, $500, or maybe even $800 a month. Ah, that’s the debt-free life.
The quickest way to make your debt-free dream a reality is to use the debt snowball method.
What Is the Debt Snowball Method?
The debt snowball method is a debt reduction strategy in which you pay off bills in order of smallest to largest, regardless of interest rate.
But it’s more than a method for paying off bills. The debt snowball is designed to help you change how you behave with money so you never go into debt again. It forces you to stay intentional about paying one bill at a time until you’re debt-free. And it gives you power over your debt. When you pay off that first bill and move on to the next, you’ll see that debt is not the boss of your money. You are.
This is how the debt snowball method works . . .
Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all debts except the smallest—throwing 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.
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Step 3: Repeat this method as you plow your way through debt. The more you pay off, the more your freed-up money grows—like a snowball rolling downhill.
The Fastest Way to Get Out of Debt
Sure, it might appear that paying off the debt with the highest interest rate first makes the most sense—mathematically. Wouldn’t that save you the most money?
Yes and no. If you begin with the biggest debt, you won’t see traction for a long time. You might think you’re not making fast enough progress and then 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 out. Getting quick wins in the beginning will light a fire under you to pay off your remaining debts! Listen—knock out that smallest debt first, and you will find the motivation to go the distance.
Great personal finances don’t happen by chance.
They happen by choice.
What Should I Include in My Debt Snowball?
Now you’re thinking like a money pro. Your debt snowball should include all non-mortgage debt—debt being defined as anything you owe to anyone else. (Though your mortgage is technically debt, we don’t include it in the debt snowball.)
Examples of non-mortgage debt:
- Payday loans
- Student loans
- Medical bills
- Car notes
- Credit card balances
- Home equity loans
- Personal loans
And by the way, there’s no such thing as good debt. Take student loans, for example. Many consider student loans worthwhile debt, but the truth is, they hurt your finances in the long run.
The average student loan debt per student is about $37,000.(1) And the grand total of outstanding student loan debt has reached $1.41 trillion.(2) Student loans are a huge roadblock to the financial success of young adults.
Think about it. Student loan repayment can seriously delay a person’s ability to buy a home, save money, and invest for the future. Bottom line: No debt is good debt.
Listen Now: What’s the Reason for the Debt Snowball?
When Am I Ready to Start the Debt Snowball?
You’re ready to begin your debt snowball once you’ve saved your $1,000 starter emergency fund. That’s what we call Baby Step 1. An emergency fund covers those life events you can't plan for. Think busted hot water heater, dental emergency or flat tire. You get the drift. An emergency fund protects you from having to go further into debt to pay for an unexpected expense.
So with that said, you’ll start your debt snowball on Baby Step 2. That means you’re current on all your bills and have completed Baby Step 1.
New to the Baby Steps? Check out this overview.
How Do I Start My Debt Snowball?
Organizing your debt snowball is simple. Sit down with your spouse, if you have one, and begin listing out all your non-mortgage debt in order of smallest to largest. From there, follow the guidelines we just covered and tackle the smallest debt first. Move to the next smallest and the next and the next until you’re debt-free.
Good news! If you’re ready to get serious about paying off debt, we’ve created a free, three-day email series that gives you an in-depth, personalized, and guided approach to creating your own debt snowball.