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Do you have debt that crosses multiple accounts? If you are like most of us, your debt consists of things like several credit cards, a student loan, or a car loan. Many of us make our monthly minimum payments on each account. However, approaching debt this way can take many years to pay off. Additionally, much of what you pay is probably going toward the interest, with the principal barely touched.
There is a more effective way to approach your debt, which is the debt snowball method. Imagine a small snowball rolling down a hill. As the snowball travels, it becomes larger as it gathers up snow. The debt snowball method works the same way. Your payment size increases with each account it travels across.
The idea behind this method is to arrange your debt from the smallest balance to the largest and then focus on paying off the smallest the smallest first before proceeding to the next account. Let’s say I have three credit cards. Their balances are $500, $ 2,000, and $2,500. I also have a student loan for $10,0000 and a car loan for $40,000.
First, I would arrange my accounts in order of their balances, going from lowest to highest. My lowest balance is $500 on the credit card. Each month, I would pay the minimum, plus every penny I could add. This may mean getting a second job or selling something. I would be committed to paying it off as fast as possible.
While attacking the $500 card, I would continue making my minimum payments on all the other accounts. When I paid off the $500 card, I would attack the $2,000 card. To do this, I would apply to it the minimum payment that I used to make on the $500 card, plus the minimum payment I make on the $2,000 card, plus any other money I can get my hands on. Again, the other remaining accounts would have their minimum payments made.
When I pay off the $2,000 card, I will focus on the next account, and so on. Doing it this way, you are freeing up money by paying off one account and adding it to the payments for the next account. Some may question this method, believing you should pay off the highest interest account first. However, doing it this way ignores basic human psychology. Paying off the lowest account will take the least amount of time, and you will have the fulfillment of knowing that you did it. This will increase your determination and confidence to pay off the next account. You can be debt free in a relatively short period of time compared to making your minimum monthly payments across the board.
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