February 4, 2018
I basically used to hide from my debt and pretend like it didn't even exist. Well - that is until debt collectors started calling me all the time and I woke up in the middle of the night worrying about it. And if you would have told me in August of 2014 that I would be almost debt-free in a matter of 3 years, there is no way I would have believed you. My brain couldn't comprehend it.
However, 3 years later, I've paid off $21,000 with less than 10k to go.
How? No, not witchcraft or magic. Not by selling my soul or donating plasma.
But simply with math.
In my Financial Peace journey, I'm still rocking and rolling in what Dave Ramsey calls baby step #2. (Pay off all debt but your house if you own one.) The Debt Snowball has been my key to whittling that larger than life debt number down quickly, while still having a social life.
The Debt Snowball calls for you to take each of your debts and line them up from smallest payoff amount to largest. You do not line them up from smallest interest rate to largest, or least favorite to most favorite, or what you feel like you need to payoff first, etc. Simply line them up from least to greatest.
Here's an example of what that might look like:
Credit Card 1 - Payoff: $500//$50 minimum payment
Personal Loan: - Payoff: $1,650//$80 minimum payment
Credit Card 2 - Payoff: $2,500//$60 minimum payment
Auto Loan - Payoff: $16,000//$330 minimum payment
The strategy is to pay only the minimum payments on each debt, every single month. Sounds easy enough, right? So, following that strategy, and throwing only minimum payments at each of these debts, we'll have Credit Card 1 paid off in approximately 10 months.
Then we have an additional $50 in our pockets because we're not using it to pay off Credit Card #1 anymore, right?!
Wrong, of course.
We then take that $50 and add it to the minimum payment for the next debt (in this example the, Personal Loan.) So then our payment setup starts to look like this:
Personal Loan: - Payoff: $850*//$130 minimum payment
Credit Card 2 - Payoff: $1,900//$60 minimum payment
Auto Loan - Payoff: $12,700*//$330 minimum payment
(*new payoffs listed to reflect 10 months of minimum payments toward each debt)
So now we will throw $130 toward that Personal Loan each month and have it paid off in approximately 7 months. Then we'll take that $130 and add it to the minimum payment for Credit Card 2:
Credit Card 2 - Payoff: $1,480*//$190 minimum payment
Auto Loan - Payoff: $10,390*//$330 minimum payment
And we'll get Credit Card 2 paid off in about 11 months. And THEN - then we'll take that $190 and add it to the minimum payment for the Auto Loan:
Auto Loan - Payoff: $6,760*//$520 minimum payment
And we'll have our car paid off in just over a year (13 months to be exact), and just like that we will have paid off $20,650 in 3.5 years.
$20,650 in 3.5 years! Crazy, right? It's not magic (it's really just math), but oh how it feels like witchcraft.
The start of the snowball is unfortunately inevitably slow. It's going to take a bit of time before it builds up into an avalanche, and that's okay. This is why you want to list your smallest debt first, so that you can have a smaller goal to work toward. You need small victories to help you stay motivated and encouraged, because while 3.5 years isn't long in the broad scheme of life, it can feel like an eternity when it's in the middle of a debt dump.
However, if you can find room in your budget to come up with a higher minimum payment for that very first debt, that will help get your snowball moving a lot faster. It doesn't have to be a ton, and it needs to be sustainable for your budget - something that you can hold to every single month. Even if you could find an additional $20, you could make your new minimum payment $70 instead of $50 and get Credit Card 1 paid down 3 months earlier. And hey, if you can't, because that extra $20 has a name and a place in your budget, the debt snowball is still going to work for you.
This is a guaranteed way to get those huge, overwhelming debt numbers (or even small debt numbers - debt is overwhelming no matter the amount) down in a manageable, sustainable way, but you've got to work the plan in order for it to work for you.
Be patient, be steadfast, be focused.
(PS - Don't have a budget template that you already love using? Download the one I've used for 3+ years by clicking the picture below. It's FREE and it works!)