If you’ve ever surfed the internet, you’ve likely heard of Dave Ramsey. He’s well known for helping people get out of debt. One of his most popular methods is the Snowball Method. It’s the second step in Dave Ramsey’s ‘Get out of Debt Plan.’ The first is to get current on your bills and to stockpile an emergency fund with $1,000.
If you are ready to get yourself out of debt, keep reading to see how the snowball method works.
Get Your Debts Organized
First, you have to get your debts organized. Get the latest information from each creditor including your outstanding balance. This is the only information you’ll need to prioritize your debts. You don’t need to know your interest rates, minimum payments, or anything else – just the outstanding balance.
You can then organize your debts in order from smallest to largest. What Dave’s looking for here are quick wins. In other words, it’s motivation to keep going in your debt payoff plan. If you start with your largest debt, you may not see progress very quickly. It’s easy to get discouraged and give up on your plan. With the snowball plan and starting with your smallest debt, you will see progress faster.
Figure Out Your Minimum Payments
Once your debts are in order, you’ll need to know the minimum payments for all debts except the lowest one. The lowest bill is the one you will start working on at a faster speed. Set up your budget to incorporate the minimum payments of your other debts. Then determine how much extra money you can throw at your lowest debt. The more you can pay at one time, the faster the snowball will start.
Paying Off Your Debts
Keep making the extra payments on the lowest debt until it’s paid off in full. Next, you’ll take the minimum payment from the paid off debt and add it to the minimum payment required for the next smallest debt. Keep paying this amount until that debt is paid off in full. You keep going down the line, adding the total minimum payments of the paid off debt to the next debt in line until all of your debts are paid in full.
Rather than paying just the minimum payments towards your debts, you can also accelerate the payments. If you are able to make extra payments towards your smallest debt, you can continue that trend down the line. Rather than adding just the minimum payments down the line to the next debt, you can add the minimum payments plus any extra you paid towards the first debt.
Credit Card $1,000 with minimum payment of $25
Credit Card $2,000 with minimum payment of $50
Car loan $10,000 with minimum payment of $250
Personal loan $15,000 with minimum payment of $350
Let’s say you can pay an extra $150 towards your first debt, the $1,000 credit card. You’d pay $150 plus $25 (the minimum payment) each month until you pay it off. Next, you’ll pay the $175 you were used to paying towards the first credit card plus the $50 minimum payment for the second credit card to get that card paid off faster. You keep going down the line until you have snowballed all of your debt with the extra payments.
The key in this method is consistency. Don’t give up even when you feel like you aren’t making progress. You should see quick progress with your first few debts, if they have low balances. Once they are paid off, you can move onto the larger debts. Again, don’t get discouraged. You won’t see progress as quickly, but trust the process. It will work and you will get out of debt much faster than paying just the minimum payments.Click to See the Latest Mortgage Rates»