The Debt-Snowball Method

RSS
Please rate this page.

As an educator, you know that lesson plans are often geared toward tackling smaller goals that will lead up to accomplishing a larger goal. You can apply that same strategy to your finances.

If you have more than one credit card or loan to pay, you may want to consider the debt-snowball repayment technique. It helps you melt debt by paying off your smallest balance first, then rolling the payment into paying off the next largest debt.

Although you may not pay debt with the highest interest rate first as some financial experts recommend, the debt-snowball method can motivate you to pay off debt faster when you see results sooner.

Here's how to make the debt-snowball method work for you:

  1. List your debts in order from smallest to largest balance. Just look at the amount owed, not the interest rate. For example, suppose you owe $8,000 in student loans, $4,000 on a car loan, $1,000 on one credit card and $500 on another. List them on the sheet with the minimum payments for each.
  2. Budget to make the minimum payment each month on every balance except the smallest one – in this example, the $500 balance.
  3. Determine how much extra above the minimum payment you can pay on the smallest balance, then pay this amount each month until the balance is paid off. So if the minimum monthly payment is $15 but you can afford to pay $100 because you are paying the minimum on your other debts, you can pay it off in a little over five months (with interest).
  4. Roll the paid off debt's payment amount to the second-smallest debt's payment. So in our example, add $100 that you are no longer paying on the smallest debt to your payment for the second-smallest debt. If the minimum payment on your $1,000 debt is $30, you would then pay $130 a month until it is paid off. (You'll see results faster if you can increase the payment even more.)
  5. Repeat until you pay the largest balance in full.

Tip: When your last debt is paid, keep your snowball rolling by designating all or a portion of the debt payments you are no longer making to your 403(b) or 457 plan.

To learn more about managing debt, read "Using Credit Wisely in Uncertain Times."