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The debt snowball is a popular solution to start working on debt reduction. The debt snowball solution is something made famous by personal finance guru Dave Ramsey. After establishing a baby emergency fund and placing it in one of the available high interest rates savings accounts, your next action should be starting your debt snowball rolling down hill.
The debt snowball solution is based more around behaviour and psychology than pure mathematics. Mathematics would suggest that you start by paying off your debt with the highest interest rate. Most people don’t look at things so objectively and rationally.
A lot of people will start trying to pay off their debt and then give up because it looks like they aren’t making any progress. But the debt snowball solution targets the lowest balance first. This way you can pay off one of your debts completely in a short period of time and this progress will motivate you to continue down the path of debt reduction.
Where to start
The best way to get started on debt reduction with the debt snowball solution is to make a list of all of your debts (Fiscal Geek has a great image of how he set up a debt snowball spread sheet in this post. Vertex 42 has a downloadable spreadsheet.) Once you have the list, sort them from lowest balance to highest.
Once you have a list of all of your debts from lowest to highest, you need to concentrate on the debt with the lowest balance. Your aim from here on out is to focus all of your effort and extra cash on getting rid of your smallest balance.
To make sure your focus is concentrated enough, you need to pay only making the minimum monthly amount on all of your other debts. If you don’t, your efforts will be diluted and you debt snowball will fail to grow. Once you reduce your monthly payments to the minimum amount, then you must focus all of the monthly income you can on paying off the smallest debt.
When your smallest debt is paid off you must make sure the debt snowball keeps growing.
Continue using the debt snowball for debt reduction
After your smallest debt is paid off, take the total monthly amount you were paying on your smallest debt and add the minimum monthly payment of your next debt. Take this new monthly total and put all of it towards the next item on your list.
Keep repeating this process as you pay off your debts and with each payment you will see another item removed from the list. Even better, as you are paying off your debts place the statements with a zero balance somewhere you can see. This will give you even more motivation to keep the debt snowball rolling down the path of debt reduction.
Debt free!
Eventually, you will work down your list from lowest balance to highest balance. As you progress, the amount of money you put towards any one debt will increase. This is the debt snowball solution to reduce your debt to zero.
Once you hit this point, the debt snowball solution has succeeded and you can move on. Where do you go from here? Subscribe to my RSS feed to make sure you catch the next post in this series.
What do you think of the debt snowball solution to debt reduction? Leave a comment below.
I have decided to start this blog with a series of posts that deal with the basics of personal finance. This is the first post in this series. To make sure you catch the rest of the series and future posts subscribe to our feed and follow Savings Chronicle on Twitter.
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