How To Use the Snowball Method to Eliminate Your Debt

According to major news sources more than fifty percent of Americans are mired in debt. If you are one of those people then the very best thing you can do for yourself is get out of debt and start building your personal wealth. The benefits are obvious. When you eliminate your debt your paycheck becomes your own. When you eliminate your debt your life becomes your own. Using the snowball method to compound the principle will help you achieve this goal.

You can start right now, but if your spending is out of control or if you have not created and held fast to a budget it will be much harder to successfully complete. I would suggest that you first read and apply How To Take Control of Your Spending. After you have done that, you will want to read about and create a budget. This article will get you on your way:How To Set Up A Personal Budget.

Things You Will Need

All your debts showing minimum payments and current balance

A Spreadsheet for Record Keeping

Tip: Clicking an image will enlarge it so you can see the example screenshots

Make a list of all your debts. For this article your debts are anything that you owe money on, will have an effect on your credit report, and lists a minimum required payment. On this list you need to list who you owe, how much the minimum payment is, and about how long it will take you pay it off. Exact payoff time is only an estimate since interest often accrues daily. But, a general figure will be sufficient.

Sort the list so that the shortest payoff is number one and the longest is the last on the list. We are going to attack this list by killing each debt one at a time. Your creditors use the power of compound interest against you. We are going to use the snowball method and the power of compound principal against them.

On the first of the month begin to put the snowball method into action. You will pay every payments minimum payment only, except the top one. For now you are going to cut your discretionary funds by about half. Add that half to the number one payment.

By doing this, you are taking a chunk of principal of the debt. The next month when they compute how much to charge you in interest they will have X number of dollars less on the principal to levy that interest on. Let's look at the math so you can see it clearly.

January Balance Due: $100.00  Minimum Payment: $5.00  You Paid $8.00

That extra three dollars must come off the principle balance of $100. Your interest is computed first, and virtually all your 5.00 minimum is interest. This way they keep the principle high and can charge nearly the same amount of interest next month. Your 3.00 just maxed their principle to 97.00. So your next 5.00 will have slightly more going to principle than it had this month because the principle is reduced by a minimum of 3.00.

Each month you will pay all your minimums, and you will add however much you can afford to the payment of that top debt. When that debt is cleared you will have won the first battle in the war using the compound principle.

When the first debt is cleared, move it from the active debts portion your list. Now take the minimum payment from that paid off debt, in this case 3.00, and add it to the minimum payment of the next debt on the list. You are now using the snowball method and the compound principle to your own benefit. Take a look at the picture and you will see it in action. The picture illustrates simple math from one payment. The fact is that the progression isn't linear. It is a very steep hill, hence the name snowball method. Your payoff will reduce itself far faster than simple math can illustrate here.

Repeat step four until the second debt is paid off. Then apply the minimum payments from debt one and debt two to the minimum for debt three. Your snowball is getting larger. If you keep this up, we'll have to change the title from the snowball method to the avalanche method. Compounding the principle works. And you can compound the principle all the way up to paying your mortgage off if you desire.

Tips & Warnings

The compound principle used in the snowball method works best when you are able to double or triple your minimum payment. If you can reduce your spending to add more money to the snowball, or even take a second job, the snowball method will work far faster than this simple article illustrates.