Getting out of Debt
If debt reduction is your goal, the debt snowball is an effective way to quickly pay off debt and gain momentum toward a debt-free lifestyle.
Before you can craft your snowball, there are three things you should know.
- The success of the debt snowball depends on dedicating extra money to pay toward your debt. Find extra money by cutting cable TV, limiting eating out or earning extra income. Do what you can to aggressively attack your debt. In the example below, we use $200; if you can’t afford $200, start with $50 or $100. To make the snowball work you must find a way to pay extra on your debt.
- Since tackling debt requires a behavioral change, aim for quick results by paying off your smallest debt first. This helps you feel a sense of accomplishment and motivates you to continue with the process.
- The extra money you allot to debt reduction (see number 1 below) will be added to the minimum payment on your smallest debt. Pay this increased amount while continuing to pay the required minimum on all other accounts.
OK, now you can customize your snowball.
First, list all of your debts from smallest to largest. List everything except your mortgage; you can focus on that later. List the creditor’s name, the account balance and minimum payment due for all debts. Your list may look something like this.
Creditor |
Account Balance |
Minimum Payment Due |
|---|---|---|
Target |
$450 |
$25 |
Chase |
$1,200 |
$100 |
Bank (auto loan) |
$9,500 |
$375 |
Next, using the extra money you identified—$200, in this example—increase the minimum payment on your lowest debt. Remember to continue making the required minimum payment on all other debt. Here’s what that looks like.
Creditor |
Account Balance |
Minimum Payment Due |
New Minimum Payment |
|---|---|---|---|
Target |
$450 |
$25 |
$25 + $200 = $225 |
Chase |
$1,200 |
$100 |
--------- |
Bank (auto loan) |
$9,500 |
$375 |
--------- |
So, the first month of your debt snowball you’ll pay Target $225, Chase $100 and your bank $375. After only two months, the Target card will be paid off!
With your first debt eliminated, take the monthly amount you paid on it and add it to the minimum payment of your next lowest debt.
Creditor |
Account Balance |
Minimum Payment Due |
New Minimum Payment |
|---|---|---|---|
Chase |
$1,200 |
$100 |
$100 + $225 = $325 |
Bank (auto loan) |
$9,500 |
$375 |
--------- |
So, now you’re paying $325 to Chase. Continue to make your minimum payment of $375 to your bank for your auto loan. By making accelerated payments, the Chase account will be eliminated in just a few months, assuming you’ve stopped charging expenses to the account. Once that debt is paid, take the monthly amount paid and add it to your last debt—the auto loan.
| Creditor | Account Balance | Minimum Payment Due | New Minimum Payment |
|---|---|---|---|
Bank (auto loan) |
$9,500 |
$375 |
$375 + $325 = $700 |
Now your new car payment is $700, so you’re paying almost double what you previously were! Do you see how you’re able to snowball your payments and eliminate your debt by finding an extra $200?
