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Understanding the Debt Snowball Method

Guest Post by Ed O’Brien

There are many consumers searching for the ideal way to pay down their debt to have more financial freedom and improve their credit. While there are varied ways and methods for eliminating debt effectively, no one program will work for every consumer.

The first step in effective debt relief is researching the various methods available to determine which one will work best for your lifestyle and financial situation. There are many ways to pay down debt and many agencies claiming they can do everything you need done – but often at a very high financial price tag.

There are other ways to effectively stabilize your financial life and remove the debt clutter weighing you down. Here we’ll take a look at the popular debt snowball method.

Considering the Debt Snowball Method

The debt snowball method of debt relief is often touted as one of the best methods by personal finance guru, Dave Ramsey (you can learn more at his site). In many cases, consumers are not sure where to start with the debt relief efforts. Using the snowball method is often an ideal way to start your debt relief process at the same time gaining momentum and motivation for your efforts.

The debt snowball method involves focusing on one debt at a time while continuing to pay just the minimum amount due on all other creditor account. By doing this, you are able to put a clear focus on debt goals as you take each step and actually make some headway rather than struggling to pay what you can here and there.

Steps of the Debt Snowball Method

Step 1: Emergency Funds & Getting Started

To start the process, you need to first gain some financial stability. Starting out with an emergency fund of cash, at least $1,000, is a good way to prepare for any unexpected expenses that can otherwise throw your plan out of whack.

Consumers in debt often have difficulties choosing the order of debt payoff. It is the advice of many personal financial experts that you select the smallest debts first as it will likely be more motivating to eliminate debts in a faster period of time small debts grant than the longer payoff periods of the largest debts.

Step 2: List Your Debts

Make a list of the debts you owe to creditors minus your mortgage payment in order from smallest to largest. Only pay attention to interest rates when two creditor debts are similar in size and repayment terms. In that case, you can put the one with the highest interest higher on the priority list.

Step 3: Pay Your Smallest Debt First

When you have the list outlined, the smallest debt will be your focus. Pay all of your other debts with the minimum amount and put all of your other available cash towards that debt until it is paid off. So if you have $500 available towards debt and your minimum amount total for all other debts is $300, put the remaining $200 toward the smallest debt. Continue that trend each month until the small debt is eliminated and then move on to the next one on the list.

Step 4: Roll Payments Into Next Debt

With the second debt, you’ll continue to pay the minimums on all other debts but you will now take the minimum amount for the next debt and apply the $200 you used on the first debt. If the minimum payment on the second smallest debt was $50, you’ll pay $50 plus $200 until the second debt on the list is paid off in full.

Step 5: Eliminate All Remaining Debts

When you reach the third debt on the list, continue with minimums on all other debts. Put a $250 payment plus the third debt’s minimum payment (let’s say $60) toward the third debt for a total payment of $310. Continue with the snowball method throughout the rest of your list.

Step 6: Invest Back Into Yourself

When you reach the end of your debt priority list, make note of the total amount you were putting towards the final debt payoff. Take that amount of cash you no longer have to use for debt relief and invest it in your emergency savings account where you stashed the $1,000. Continue putting just as much focus on saving as you did on eliminating debt and you will have few financial worries in the future.

Re-Prioritizing Financials

One important lesson to learn after successful debt elimination is never to let history repeat itself. After taking the time and energy to eliminate debts of the past, organize and prioritize your financial goals and management skills to prevent debt from accumulating again.

Start using a budget worksheet each month so you’ll be aware of just where your money is going. Avoid financial temptations that will get you back into trouble and remember to keep your savings going strong.

Any consumer has the power to relieve their own debts but it takes time, consistency, and follow-through to find success. Improving your overall financial situation by eliminating debts, building savings, and improving credit profiles is the cornerstone of financial stability during your life and long through to retirement.

Ed O’Brien is a seasoned writer in personal finance, specializing in credit repair. You can find more of his articles located at CreditRepair.org.

Photo Credit: Kamshots

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