Debt drains our finances of its strength.  You need to pay off your debt so you can keep your money and start accumulating wealth.  The best way to achieve this is by following a well laid out plan.  The good news is that a plan has already been developed for you.  All you have to do is implement the debt snowball method to become debt-free.

I know the debt snowball works because I have used it myself.  It is easy and very effective, but you have to follow the plan precisely if you want to get the best results.  It has been refined by many people over the years and over time it has become a well-oiled machine for eliminating debt.

Prerequisites to the debt snowball

In order to successfully use the debt snowball, there are some things you should have already done.  They are:

1.  Decide to become debt-free

This may seem obvious, but the more firm you are in your decision to get out of debt, the more likely you will be to succeed.  You need to attack your debt with intensity.  You have to get fighting mad about past financial mistakes.  The debt snowball works best if you focus with single-minded determination on it, especially at first.

2.  Create a starter emergency fund

Paying off debt has a lot to do with momentum.  You want to do whatever you can to preserve your momentum once you get started in the right direction.  However, life happens and it often costs money.  Therefore, you want to have some cash put back to pay for these types of emergencies.  This will lessen the likelihood that your debt snowball gets interrupted leading you to discouragement.

3.  Create a personal finance budget

A budget is a necessary tool to track your spending.  It helps you know exactly where your money is going.  This gives you the ability to direct your money for the purpose you desire which right now is paying off debt.  The sooner you get a good budget in place, the better progress you will make with your debt snowball.

4.  Frugal up your finances to create margin

You need to reduce your monthly spending below what you earn so you have extra money to apply to paying off your debt.  For a period of time, you need to become the most frugal person you know.  The sacrifice is worth it and this is just a season.  Once you become debt-free, then you can lighten up a little.

You can click on any of the links above to get more information for completing each of these prerequisites.  Once you’ve done the four things above, then you are ready to really apply yourself to paying off your debt.

How to implement the debt snowball to pay off debt

The debt snowball technique that I detail below was popularized by Dave Ramsey.  This is the plan that I followed to get out of debt so, I know it works.  It has also helped thousands of others to do the same.  Here are the steps to implementing the debt snowball:

1.  List your debts from smallest to largest excluding your mortgage from the list.

2.  Make minimum payments on all but the smallest debt.

3.  Pay the maximum amount you can on the smallest debt.  Don’t worry about the interest rate or other terms.  Simply pay the most you can towards the one with the smallest balance.

4.  Once the smallest debt is paid off, take the total amount you were paying towards it and apply this amount to the next debt on your list.  Keep doing this until all your debt is paid off.

A short debt snowball example

Let’s say that you owe three debts as shown below listed from smallest to largest:

After creating your budget and frugaling up your finances, you created $200 in margin between what you earn and what you spend.

You would start out your debt snowball by applying the $200 toward the credit card.  So, your total monthly payment to the credit card bill would be $230.  This means that you would pay off your credit card in just over two months!

Once the first debt on your list is paid off, then you take the total payment amount and apply it to your next debt.  In this case, you would take the $230 you were paying toward the department store credit card, add it to the $100.00 minimum payment on your student loan and start paying $330.00 toward its balance.  As you can see, your money snowballs from one debt to the next accumulating a bigger payment as you go.

By the time you get to your car loan, you will be making a total payment of $630.00 which is just over double the minimum!  This will pay it off fast because the extra you send in each month goes directly toward the principal.

The debt snowball is a technique that works!

As you can see from the example above, this technique is very powerful at paying off debt fast, yet it is simple enough that anyone can do it.

One last word, it is possible to get out of debt.  No matter how much debt you have accumulated, no matter how bleak the situation may seem, it is not impossible.  You have to believe this.  If you totally commit yourself to the debt snowball and work it like a maniac, you will see results.

I highly recommend creating a very simple chart that you post on your refrigerator or another conspicuous place to remind you of your progress toward becoming debt-free.  This process is likely to take some time, but most people pay off all their debt in 18 to 24 months regardless of how much they owed.

The chart will help remind you that what you are pursuing is 100% possible.  As long as you believe and continue working your snowball, you will succeed!

Photo by Vanity Press

If you want to get serious about improving your financial position there is no better time to start than today. You might think that you are in too deep of a hole to ever get yourself out, but you might be amazed at how quickly you can make positive traction. I am 100% convinced that debt-free is the only way to live successfully. The Bible says that the borrower is slave to the lender (Proverbs 22:7) and I believe it. When you owe someone, you work for them. Your options are limited because you have to continue to make those payments. Debt is the biggest obstacle you have to becoming truly wealthy.

So, how does one change their ways and start fresh? I recommend you start by reading Dave Ramsey’s book, “The Total Money Makeover”. It lays out a simple plan to get you from where you are today to becoming financially independent. It is a complete map of what you need to do. It is not a get-rich-quick scheme. It is real and practical. I have been following his advice for the last year and it is truly paying off. Most people are able to pay off all their debts except the house in 18 to 24 months. I didn’t see how this was possible when we started, but here we are about 18 months later and we will be debt-free next month!

You might also want to check out Dave Ramsey’s Website and Debt-Proof Living. The key is to get started. We all know that getting started is half the battle. You simply have to decide that this is what you want and then GO FOR IT!