Debt Snowball Method: Making a snowball

As the saying goes, when life serves you lemons, make lemonade. And, it could be said, when life brings debts that threaten to bury you like an avalanche, make a snowball. The snowball in this case is a get-out-of-debt plan that requires intense focus, superb record keeping and cruel discipline. Picture your ability to pay off debts as a little snowball perched atop a snowy hill. Give it a push and watch it gain speed and size. That’s how the debt snowball method can work. But you have to get it rolling and keep it rolling. Before you begin, you may want to talk with a debt-management professional and consider other options.

Debt management loans

Debt-management loans allow you to combine many debts into a single payment. The debt-consolidation firm will obtain needed debt and finance information from you. It will then call your creditors and negotiate new terms, which can include lowered monthly payments, lowered interest rates and reduced late fees. When creditors realize that you’re working with a debt-consolidation firm, they stop hassling you. If you choose this method, make sure that you do not run up new debts while paying off old ones.

Video: Dave Ramsey's Debt Snowball Method of Getting Out of Debt

Going it alone

If you decide to explore the debt snowball method and try to eliminate debts on your own, follow these steps:

• Understand that the most important step is to find out exactly where you stand financially. Make a budget and see how much you can realistically apply toward paying off your debts each month.
• Cut back on some unnecessary purchases to free up money for this purpose. Let’s say you eliminate take-out coffee and fast food completely. And let’s say that frees up $200 a month. Plan to apply this to your bills.
• List your debts in ascending order -- that is, from smallest to largest. (Do not include your mortgage.) Paying off the smallest debt first, regardless of interest rate, is the central idea behind the debt snowball method.

• Make minimum payments on all the other debts so that you can start building a better credit report.
• Pay as much as you can on the smallest debt. Add something extra to the minimum payment required. For instance, if your smallest debt requires that you pay $75 a month, try to make it $100. Write down everything on your worksheet.
• As soon as you have paid off the smallest debt, take the amount you were paying on it and apply that amount to the next debt on the list, adding as much extra as you can. Keep this process going until you have paid off all your debts.
• Never miss a minimum payment. The debt snowball method works only if you stick to deadlines. Never allow yourself to be charged late-payment fees.

Don't charge new purchases. If you keep on charging, the vicious cycle continues. Owning a credit card is a big responsibility.

Video: The Debt Snowball Method

A real-world example

Here’s an example of how a real person managed to become debt free in less than two years. Here are her creditors, how much she owed them and the minimum payments she was obliged to make. Note that she listed debts from smallest to largest.

Creditor	Balance owed	Minimum payment required
American Express	$500	$30
Student loan	$2,000	$100
Automobile loan	$7,500	$300

She started by applying $200 that she was able to save each month (by cutting out all fast food, perhaps) toward the AmEx card. Her total monthly payment to that bill was $230. She paid off this debt rapidly. Then she took that payment amount of $230 and applied it to the student loan, adding it to the $100 minimum payment and paying a total of $330. When she started paying off her car loan, she was making monthly payments of $630. Her payments snowballed as she moved from one debt to the next.

From paper lists to computer spreadsheets

You can prepare a simple paper list like the one above or find a much more powerful, computerized version on the Internet. To begin with, keep it simple, taking a list like the one above and making it your own. If you later want to automate the arithmetic, you can go the computer spreadsheet route.

Professional help is at hand

By using the debt snowball method, you can start down the road to reducing debt. You won’t need many years to pull yourself out of debt, but you will need a great deal of willpower. If you try it and find that you simply don’t have the inner strength to keep yourself on course, contact a debt-consolidation company and ask for help.