If debt seems to be closing in on you, you’re definitely not alone. According to the latest reports, America’s collective household debt topped the $13 trillion mark last year. On average, those under the age of 35 carry debts of more than $66,000. For those in the 35-54 age range, this figure doubles before tapering back off to the $60,000 range later on in life. Some 70% of the nation actually exits life still owing creditors.
Fortunately, not all is lost. In a sea of solutions to mounting balances, a few stand out from the rest. One of these is the debt snowball method. As a path to financial freedom and payoff accelerator strategy rolled into one, it’s designed to help you effectively eliminate debt, and much more quickly than you might without a structured plan of attack.
What’s the Debt Snowball Method?
With the debt snowball method, you’ll tackle your debts one by one, starting with the smallest and working your way up. It’s described much like the snowman-building tactics of childhood. Grab a small handful of snow and pack it tightly to create a firm core. This is the equivalent of your first debt to be paid off. Then, roll it around to add more snow and make it grow steadily larger. This phase could be equated to your continuing efforts to take on each subsequent higher balance on your list.
In the end, you have a nice, big, solid snowball any snowman would be proud to stand on as long as you followed protocol and exercised patience and diligence along the way. Of course, if you were to rush the effort and approach it in a haphazard manner, it’d crumble into a shapeless heap, and you’d have to start all over again. This applies to the debt snowball method as well.
How to Get Started
As is the case with any endeavor worth pursuing, the debt snowball method entails formulating a plan and following certain steps. First, the strategy’s creator, Dave Ramsey, recommends getting any past due bills paid current and building an emergency fund of at least $1,000 before plunging into the debt elimination phase of the process.
From there, create a list of your current debts, excluding your mortgage. Ongoing expenses such as utilities, food, and insurance are left out of the mix as well. Arrange your debts in order of smallest balance to largest, including monthly payment amounts for each. Your mission, should you choose to accept it, is to pay off that smallest debt while making minimum payments on all the others. This is where you’ll dive a bit deeper.
Analyze Your Finances
Once you’ve ordered your debts from lowest to highest, it’s time to find out just how much of your budget can be funneled into the smallest one each month until it’s paid off. Keep in mind, you’ll still need to plan for basic monthly expenses and minimum payments on other loans, store charge accounts, credit cards, and so forth.
Finding the Extra Money to Make it All Come Together
Many people find themselves stranded at the $1,000 emergency fund juncture while others struggle to come up with extra funds to allot to their smallest debts. Either way, getting the ball rolling isn’t always a simple matter. Of course, there are plenty of ways around this particular roadblock. Most realize that money is hiding in places so obvious that they’ve completely overlooked them.
Use Your Tax Refund
Tax refund season is a highly anticipated time of year for most people. Unfortunately, many find all this extra money is gone before they know it, and they have nothing of real value to show for it once all is said and done. Instead of taking a vacation or spending hundreds of dollars on new clothes and electronics, consider investing your tax refund check into your debt snowball plan. For some, this single spurt of found money is all it takes to achieve those initial results.
Make Unused Items Work for You
From broken jewelry to gently used clothing, the majority of Americans have at least a couple hundred dollars worth of potentially valuable items just sitting around their homes collecting dust. Go on a treasure hunt in your closets, garage, and attic, and turn those unused items into extra cash to put toward your financial freedom. Whether you take the garage sale route or visit the local pawnshop for such transactions, they’re sure to pay off.
Scale Back Your Cable or Satellite
How many times have you scrolled through hundreds of channels only to discover there’s nothing on besides infomercials and block after block of repeat programming? This issue plagues cable and satellite customers regardless of the package they’re currently subscribing to. You could save $40 or more per month by scaling back to the basic package without actually losing anything noteworthy. That money would certainly go a long way toward eliminating the first debt in your snowball plan.
Take on a Side Hustle
Committing yourself to a full-blown second job may not be feasible in light of your schedule, but plenty of odd jobs are out there for the taking. If you happen to be handy around the house, let those skills boost your income. If you’re an artist, create a few pieces to sell. Make jewelry or hand-painted knick-knacks to peddle online or at local flea markets. Even taking online surveys could pay off over time. Every little bit helps, and getting that first accomplishment out of the way frees up money to foster further efforts with the debt snowball plan.
These are only a few of the steps you could take to kickstart the process. Let creativity be your moneymaking guide, and have a little fun with it. Paying off your smallest debt and moving on to the next one on your list is an incredibly fulfilling experience, and it’s known to create even greater motivation moving forward. All it takes is getting started and putting some thought and effort into the matter. From there, the rest is bound to fall into place.
Moving on to the Next Phase
After you’ve eliminated the smallest debt on your list, you’ll be free to proceed to the next one. Roll over the amount you paid on it each month to your second item of focus, and add it to the minimum amount you were already paying. This one may take a little longer to melt away, but you’re sure to see the progress as you go. Once it’s gone, you’ll repeat the process with the following debt until they’re all effectively lifted off your shoulders.
Keeping Things Going
While certain small steps can help get your snowball rolling, paying off that first small debt is only the first leg of your journey. Keeping pace is going to take continued planning and effort. This, too, requires a great deal of dedication.
Develop a Budget
As you analyze your monthly expenses, and you get a feel for how much money will need to be allotted to monthly payments over time, keeping pace could get a little more complicated. It’s important to create a detailed budget, including your debts, ongoing expenses, savings, and other financial elements. Don’t leave anything out; otherwise, you’ll be heading for disaster.
Stick to the Plan
Creating a budget is a vital component of victory, but simply having it on paper isn’t enough. You have to stick to it month after month without letting temptation draw you astray. Hold fast to your financial guidelines and they’ll keep you on track for continued success.
Stay Away from New Charges
Seeing your debts melt away and freeing up more of your finances could easily open the door for fun spending adventures. Don’t buy into it. Keep putting that extra money into the next debt on your list instead of making new purchases or opening additional charge accounts.
Be Realistic with Your Expectations
Though the debt snowball method is a payoff accelerator plan, working your way through all your debts is still going to take time. If you bring in $45,000 per year and you’re $60,000 in debt, financial freedom won’t come about in a matter of six months. Be enthusiastic, but don’t set yourself up for disappointment.
Don’t Overpressure Yourself
While it’s crucial to develop a budget, hold fast to it, and avoid any new expenditures, it’s also vital to remember you’re only human. You might slip up. Some emergency could arise that exceeds your current savings. Setbacks are inevitable, but they’re only temporary. If you’re thrown off course, just take a deep breath and work your way back on track.
As long as you put forth your best effort to hold true to the monthly budget and avoid unnecessary spending, you’re sure to triumph over debt. Delays could crop up, and you’re entitled to a dinner out or some other indulgence here and there. Don’t go overboard, but don’t beat yourself up over oversights, either. Do the best you can, and don’t forget to refigure your budget from time to time to find new ways to distribute your income across the matters at hand.
Other Factors to Keep in Mind
Adding as little as $20 or $30 per month to those first-priority debts will help chip away at the overall balance, but the more you’re able to devote to them, the faster they’ll disappear. At the same time, though each payoff frees up more money for the next one on the list, each one to follow will be more substantial. This means exceeding the minimum monthly payments will get more difficult as you work your way through the pile.
Investing more money into your debt snowball plan could require certain sacrifices. Vacations may not be part of your life for a few years. Staying away from restaurants and coffee shops might be necessary. Finding financial freedom means cutting back on unnecessary spending. Some additional ways to do this include the following.
Shopping Smarter
If you’ve ever heard the saying, “Never pay full price,” it certainly applies in this situation. Too many sales, special offers, and discount codes are floating around in stores and online to allow you to pay the full price for anything. Shop around to find the best deals. This patience and diligence will definitely pay off in the end.
Clipping Coupons
In line with deal-hunting adventures, saving money at the supermarket could leave considerable wiggle room in your budget for debt payoffs. Take advantage of coupons, sales, and less expensive store brands as opposed to name-brand alternatives. You’ll be well rewarded for your efforts, and you’re not likely to notice any difference in quality when it comes to those store brands.
Finding a Less Expensive Ride
Though the latest vehicles to hit the showroom floor are sleek, shiny, and well equipped with exciting new features, they come with significant monthly payments. If you need to purchase a vehicle, consider choosing an older, road-tested model, perhaps even one you could pay cash for. Plenty can be said for the extra money you’ll have left over each month without exorbitant car payments. It may not be as flashy as your neighbors’ vehicles, but they won’t be out of debt in a few years.
Reining in the Holiday Spending
Christmases, birthdays, and anniversaries don’t have to cost thousands of dollars, or even hundreds for that matter. No one’s saying you should channel Ebenezer Scrooge during these times, but don’t go overboard, either. Save the more elaborate gifts for after you’ve achieved a debt-free lifestyle. Then, you’ll be able to lavish your loved ones with extravagance and even pay cash for all those big-ticket items.
Seeking out New Offers
From cable and internet to credit cards and insurance coverage, you’re bound to find any number of better rates than what you’re paying now. Call around to other providers or speak with current ones to find out what might be available. Chances are strong that you’ll find lower rates somewhere along the way.
Being dedicated to the debt snowball method does require cutbacks and sacrifices, but this doesn’t mean you’re actually losing anything or missing out. In fact, you’re gaining far more in the grand scheme of things than you’d ever miss while paying off those debts. Once you achieve financial freedom, it’ll all be worthwhile.
Example of the Debt Snowball Method in Action
No two people have the same income or debts, so the possibilities here are endless. That being said, seeing a general example might help motivate you to get started. Look at the following sample debt rundown, and see how the debt snowball method fits into its payoff.
Say you carry a $5,000 debt on one credit card and $3,000 on another. Reports place current average interest rates on credit cards at about 17% with some hovering at 13%, so let’s apply the lower one to the former credit card and the highest to the latter. Besides those debts, we’ll add in a $500 bill for recent emergency dental care. Some medical services don’t charge interest, but the going rate right now is around 12%, so we’ll go with that.
Figure in a $15,000 remaining balance on a student loan as well, which is actually less than half the national household average at this point, with a 5% interest rate in line with the recent norm. With these examples, you’d order your debts as follows:
- $500 dental bill
- $3,000 credit card balance
- $5,000 credit card balance
- $15,000 student loan
Now, let’s examine the matter from a minimum monthly payments point of view. On your dental bill, this would amount to roughly $24 per month for a couple years, placing the total cost to you at more than $564 with interest included. On the $3,000 credit card balance, minimum monthly payments would run you $60. In light of the extra $6,000 in interest that you’d be charged over time, payoff would take 27 years.
In terms of the second credit card, minimum monthly payments would be $100 for over 23 years with more than $5,000 in interest over time. When it comes to your student loan, payments for a five-year term would be about $283 per month.
Ideally, you’d attack your dental bill first. Perhaps you were able to come up with an extra $150 per month to eliminate this expense. After adding this amount to the $24 originally paid, you’d be paying $174 each month. Instead of applying minimum amounts for two years, you’ll have this one out of the way in a matter of three months.
From there, you’d move on to the $3,000 credit card balance. Keep in mind that you’ve been making minimum payments all the while, but the majority has been going to accruing interest rather than principle. Add the $174 now freed up by paying off the dental bill to the $60 minimum monthly payment. Now paying $234 each month on this debt, you’ll have it paid off in a matter of 15 months. It’s worth mentioning this would cut your total interest down to only about $330.
Now, you’ll hone in on the $5,000 credit card balance, boosting those $100 payments to $334 per month. In less than 17 months, you’ll have this debt off your shoulders after having paid just under $500 in interest. All that’s left then is the $15,000 student loan. Applying the $334 to the previous $283 will place your monthly total at $617. At that rate, this debt will melt away in about two years.
Ta-da! You’re debt free, and in far less time than the two decades it would’ve taken by plodding along with only minimum monthly payments. All your hard work, determination, and sacrifice paid off on a monumental scale, and you’re free to upgrade to premium cable and go on an extravagant vacation around the world.
Is the Debt Snowball Plan Right for Me?
For most people, the debt snowball could certainly be an effective route to a debt-free life; of course, it’s not an ideal solution for everyone. If you only have one credit card holding you back with no additional debts other than a mortgage, then budgeting, planning, and restraint may be all you need to find financial freedom. Should you be unwilling to make sacrifices and live a minimalist lifestyle, you’d be best served by other options.
Those living paycheck to paycheck with absolutely no wiggle room left in their monthly household incomes may need to explore other alternatives, such as debt settlement. In the event you’re current on monthly expenses but can’t seem to get off the ground with the snowball method, seeking a debt consolidation loan might be a more effective approach.
Deeper Considerations
In many cases, following through with the debt snowball method brings up a few additional questions. For one, deciding whether to hang onto certain expenditures or let them go altogether weighs particularly heavy on people’s minds. This is often true when it comes to costly vehicles being figured into the overall plan.
If you’re trying to determine whether keeping your current vehicle is the best route to take, a couple key factors can help make the decision a bit easier and more conducive to your debt resolution efforts. First, take into account just how much longer your automobile loan term is. As a rule, if you’re looking at paying on the vehicle for more than two more years, selling it would be the way to go.
Secondly, if its payments and other related expenses are consuming more than half your monthly budget, it’s probably not worth the investment. This basic directive applies to campers, motorcycles, boats, and other similar elements as well. With the exception of your mortgage, any purchase taking up more than half your income that could potentially be eliminated without damaging your credit probably should be tossed. It’ll help take a great deal of financial burden off your shoulders while further fostering your snowball plan.
Aside from taking your monthly expenses down to bare minimum, it’s also important to look at your outlays from a new angle. Saving for the future may be crucial, but contributing to your retirement is actually counterproductive to the debt snowball method. Don’t dip into your retirement savings to get the snowball rolling, but don’t invest any more income into it until you’re officially debt free. At that point, you’ll have considerably more money to funnel into retirement and be more than capable of making up for lost time.
Suppose Something Goes Wrong
By cutting expenses and following your plan to the letter, you’re virtually guaranteed to experience a great deal of personal fulfillment and financial success with the debt snowball method. Of course, you can’t plan for every issue. No matter how diligent you are, you can’t necessarily prevent outside forces from slowing your momentum.
Jobs could come and go through no fault of your own. Significant new expenses may crop up, as in those far more costly than a broken appliance or damaged vehicle. Unexpected illnesses and injuries often come about, causing people to miss time from work and fall behind on their bills.
In the event something like this arises during your debt elimination venture, don’t panic and don’t give up. Contributing extra money to the outlays on your list might not be possible while in the throes of hardships. Simply set your snowball on the back burner and revert to making minimum monthly payments until the trial passes. Since you’ve already begun growing accustomed to a barebones lifestyle, you’ll be right on track to weather the storm. Getting out of debt may take a little longer than anticipated, but you’ll still get there in due time.
What Comes Next?
In truth, the debt snowball method is one of a series of steps designed to help bolster financial independence as well as people’s overall lifestyles. Though eliminating the majority of your debt gives you a great deal of breathing room, this isn’t the end of the line when preparing for the immediate or long-term future.
Once all those debts included in your snowball are out of the way, it’s time to start looking ahead. An extended job loss or injuries from a vehicle accident could easily send you right back into debt, rendering all your previous efforts futile. For this reason, your first follow-up considerations after finding success with the debt snowball method should be building a more substantial emergency fund.
Keep your budget going, and contribute as much money as possible to a dedicated just-in-case savings account. Experts suggest setting aside enough funds to cover at least three months of expenses, but planning for six months or more would certainly be beneficial. This way, you’re not quite so vulnerable to life’s unpleasant surprises.
From there, turn your attention back to your retirement savings. In general, allocating at least 15% of your household income to the future is recommended. At the very least, divert enough into your work-based 401(k) to get your employer’s maximum match offer. Otherwise, consider setting up Roth IRAs for yourself and your spouse. As little as a couple hundred dollars a month will make a monumental difference in the future, but since you’ve freed up a significant portion of your income already, chances are strong that you’ll be able to contribute even more.
If you have children, college expenses are going to enter the picture at some point, and these aren’t trivial matters. Start devoting a portion of your income to your children’s educations. This generates a couple key advantages. For one, it’ll help you avoid the common struggle when higher education becomes imminent. Secondly, it’ll go a long way toward keeping your children from being among the 70% of Americans who are already in debt at the hands of student loans when they leave college.
One of the last subsequent steps in the plan, but certainly not the least important, is addressing your mortgage. If you’ve seen the snowball through to completion, this should be the only debt standing between you and financial freedom. Above all else, be sure to read the fine print on your home loan agreement to be sure you won’t be subject to early payoff penalties. If there’s an issue, consider refinancing or speaking to a professional about possible ways to avoid those unnecessary expenses.
Then, start funneling extra money into your monthly house payments. As was the case with your other debts, the mortgage will quickly melt away, taking with it thousands of dollars in interest. Once your home is paid off, you’re truly free to follow virtually any pursuits you’d like.
Bottom Line
Based on the latest reports, only a select handful of Americans are currently living without debt. Most have at least a couple credit cards, student loans, and other outlays standing between them and financial freedom. Unfortunately, this is a lifelong issue following many of us to the grave.
Dozens of alternatives are available to those who want to work their way out from under crushing debt. While not all are a suitable fit for everyone, the debt snowball method certainly has its place. Attacking the smallest debt first gives many the conviction and motivation they need to follow the plan through to completion.
This strategy isn’t without its difficulties. Building an emergency fund and squeezing a little extra money out of the monthly household income just to get started could prove to be a challenge. Besides those initial hurdles, ongoing diligence is also required. For those willing to cut back, make sacrifices, and live by a strict budget, though, it’s feasible.
Though the sacrifices alone are enough to turn some people away from the debt snowball method, those who stick with the plan vow that it’s well worth the effort. With dedication and determination, you could not only work your way out of debt in much less time than you might expect but save a great deal of money on interest in the long run. Achieving success, in turn, opens countless doors for future pursuits and grants you endless possibilities as you forge ahead.