Even though everyone tries to make good financial decisions, sometimes a little debt can spiral out of control. Suddenly, you find yourself with a pile of bills and a whole lot of stress. So what do you do? Create a plan! The debt snowball method is a way of tackling your debt in small and manageable steps, so you can easily make progress without feeling overwhelmed. Let's go into the basics of the debt snowball method, and learn how to get out of debt!
Step 1: Make a List
Before you can pay off all your debts, you need to know exactly who and what you need to pay. Make a list of all your debts in order of smallest to largest. For now, ignore the interest rate and just pay attention to the total amount owed. Here is an example:
- Credit Card: $1,000
- Auto Payment: $3,000
- Student Loans: $10,000
- Mortgage: $50,000
This list will become your blueprint for debt reduction. From now on, you will pay the minimum payment on every bill on your list - except for the smallest. The smallest bill is your first priority for elimination. That means any spare cash that you encounter will go into paying that bill until it is fully paid off. In this example, you would pay the minimum amounts on your auto payments and student loans. But any money you obtain through a second job, gifts, or budgeting will go toward your $1,000 credit card bill. Once the credit card bill is paid, repeat the process for your auto payment and so forth.