At some point, people who become debt-free decide that enough is enough. Their old lifestyle wasn't working, and they're ready to...
3 Minute ReadTopic: debt
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 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!
Focused intensity, starting with your smallest debt, leads to a big result!
You CAN be debt-free! And the debt snowball is just part of the plan you need to take control of your money. Get started with Financial Peace University!
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