Want to get out of debt? You’re not alone. The average American household owes roughly $15,654 in credit card debts alone, according to a 2017 report by NerdWallet. With a staggering amount like this, paying it off seems almost impossible to do.
As the bills keep stacking up, you do your best to keep up and pay them down as best as you can. But sometimes, you feel like that pile never seems to shrink at all, and it can get frustrating.
Looking for ways to get out of debt doesn’t have to be complicated. However, when you do your homework and search online, you’ll find plenty of tips from financial gurus on how to pay off your debts, and you can get overwhelmed, and not be sure which method will work best for you.
While some may argue that the best way to get out of debt is to start paying off the loans with the highest interest rates first, it may not work for you. Some people need to feel a sense of accomplishment for them to continue paying off their debts.
Sometimes, it’s the small wins that can keep them motivated. And that’s where the Debt Snowball Method by Dave Ramsey comes in. Our good friends at Alpha Car Finance breaks down what this method is, how it works, so you can use it to get rid of debt.
What is the Debt Snowball Method?
In simple terms, the Debt Snowball Method works by building momentum. You start off small, then grow that momentum as you take on your other, larger debts one at a time. It’s pretty straightforward. Before you get started, you need to get organised. Follow the steps listed below.
1. Write down all the debts you have. You should have them arranged from the lowest balance at the top to the largest balance at the bottom of your list. So, for example, your basic list could look like this:
- Credit card 1: $500 with a monthly minimum payment of $50;
- Credit card 2: $3,000 with a monthly minimum payment of $70;
- Loan 1: $6,000 with a monthly minimum payment of $120;
- Loan 2: $9,000 with a monthly minimum payment of $80.
2. Make the minimum payments on all those debts, except the lowest one, which is Credit Card 1. Let’s say you make an extra $500 on the side with a second job, you can pay off Credit Card 1 using the additional $500 you make from your side gig, along with the minimum payment of $50. Now, that debt will be paid up in a month. So, the idea is to start paying up the lowest debt until it’s done, then move on to the next one.
3. Because you’ve paid up Credit Card 1, you can now use that $550 amount on Credit Card 2. Now, add the $70 monthly minimum payment to your $550, which amounts to $620. In about nine months, you’ll be all paid up with that second debt on your list.
Then move on to the third debt on your list, using the same process. Wash, rinse, repeat. You get the idea. In just a few years, you’ll be debt-free.
If you want to be on top of your debts and payments, you can use some free software online or download a mobile app. These handy tools can help you sort things out, like an estimated time when you can expect to be all paid up on your loans.
Now, remember, this method may or may not work for everyone. So, study closely if the Debt Snowball Method will work best for your current financial situation. Sometimes, life can throw you a curveball, and you need to adapt. But having a plan in place will increase your chances to be debt free sooner rather than later.
Have you tried the Debt Snowball Method? How was your experience? We’d love to hear it. Please leave a comment below.