Financial Planning

This is part four of the series How to Get Out of Debt.

Sometimes debt makes you feel like you are trapped under immense pressure, causing you to struggle to breathe. If you feel yourself being pulled under by the current of debt, there’s hope. Use a Debt Snowball, and pull yourself out.

A Debt Snowball is where you focus extensively on paying off your smallest debt first, and then move on to the second smallest and work your way from there. The main purpose of the Debt Snowball is to work as a psychological tool to keep you motivated to continue paying off debts, one at a time.

Math or Emotion?

Debt is almost completely about emotion and psychology. If you think you can’t get out of debt, chances are… you can’t. It’s like what Henry Ford said, “Whether you think that you can, or that you can’t, you are usually right.”

The Debt Snowball is advocated by big-name financial “gurus” like Dave Ramsey. If you feel emotionally on the ropes, then this might be your best bet. If you have nerves of steel, it might be best to read the alternative snow-ball explained lower on this page.

The specific steps are listed below.

The Basic Debt Snowball

• List all debts from smallest to largest.

• Commit to pay the minimum payment on each debt.

• Find an extra amount, on top of the minimum, that can be applied towards the smallest debt — this amount is your “snowball” amount.

• Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.

• Add the old minimum payment from the first debt to the extra amount, and apply the new sum to the second smallest debt — your snowball amount has just gotten bigger, and will get bigger after each debt is paid off.

• Repeat until all debts are paid in full.

Alternative Snowball Version

Some individuals support putting the list in a different order. Rather than focusing on ordering the list smallest to largest, they claim that you should organize your debts from highest interest to lowest interest.

This makes sense financially, and the math certainly ads up. If you focus on the highest interest first, you’ll save money — supposing that you still pay the snowball constantly. But there are two problems with this:

• You lose the psychological boost. The snowball is primarily psychological. Half the game is mental.

• You don’t really save much. You might save $20-50 a year, and that’s only if you pay the same amount off. Chances are slim that will happen.

This is why you should start all major goals with baby steps. You still get the job done, and you are more likely to succeed. Think of it as manipulating yourself until you get what you want out of yourself. It certainly works for many people.