There are a lot of different theories and systems out there for reducing debt. Some say pay off your highest interest rate first. Some say pay extra on all debts. Some say pay the lowest balance first. Some say invest first, then pay extra on debts. Some say the opposite. Which one is best? I prefer the debt snowball technique.
What is the debt snowball? It’s perhaps the simplest and most effective method for eliminating debt. Here’s how it works: list all of your debts from smallest total balance to largest. Make the minimum monthly payments on all but the smallest debt. Then take every extra dollar you can squeeze out of your budget and throw it on the smallest debt. Do this with intensity and focus until it’s gone. When it’s gone, take everything you were paying on that debt and throw it at the next smallest debt until it’s gone. As you go, you begin to build momentum like a snowball rolling downhill. As it rolls it picks up more snow and more speed until it becomes an unstoppable force. The debt snowball acts much in the same manner. As you make progress you build up more steam and gain momentum.
So here’s why the debt snowball is so effective.
- It’s simple. Everyone can relate to the analogy of the snowball rolling downhill.
- It allows you to win. Winning is fun. Success is fun. When you try the other techniques, they can take a long time to see actual results and you can get discouraged and give up. Seeing the results of paying off the small debt first gives you an emotional boost that keeps you going.
- It’s structured. The debt snowball gives you a system that you can follow and goals for your budget. Having goals helps you avoid impulse purchases on things that delay progress.
What are you doing to eliminate your debt? If it’s not working, you may want to give the debt snowball a try. But don’t just try it. The most effective way to work the debt snowball is to attack it with focused intensity. Commit to never borrowing money again or using credit cards, and commit to becoming debt free.? Hey, if you become debt free and decide you don’t like it, you can always go back into debt!Matt Wegner is a personal finance, small business and leadership coach focused on teaching his clients the tools for L.I.F.E. (Living In Financial Excellence). Start your debt snowball by requesting a free planning session today or visit financialexcellence.net.