How to Use the Snowball Method to Get Out of Debt Quickly

The Snowball Method is a snazzy little trick that can help you pay off debt as quickly and efficiently as possible.

Many Americans owe so much money that they have no idea how they’ll manage to pay it off, and Christmas just made it worse. Even though the bills haven’t come rolling in yet, a survey from T. Rowe Price speculated that average spending this year would be $422 per child. (Which means half of Americans intended to spend more than that.) Because many Americans have little cash to spare, it’s a safe bet that these Christmas gifts were directly added to credit card debt.

Debt that is already astronomical, by the way. Household debt is over $12 trillion and climbing. Michael Snyder broke it down into numbers that are easier to grasp:

It breaks down to about $38,557 for every man, woman and child in the entire country.  So if you have a family of four, your share comes to a grand total of $154,231, and that doesn’t even include corporate debt, local government debt, state government debt or the gigantic debt of the federal government.  That number is only for household debt, and there aren’t too many Americans that could cough up their share right at this moment.

Do you remember when I wrote about how credit card companies are specifically targeting less educated and less sophisticated consumers?  Well, that is where much of the credit card debt growth has come lately.

And to make matters even worse, 35% of these indebted Americans owe money that is past due by 180 days or more.

If you’re in debt, there is a way to dig your way out.

The best book I ever read about paying off debt is The Total Money Makeover, by Dave Ramsey. You may be able to find it at your local library, but if you can’t, I suggest you buy it. Even if you are struggling financially, I recommend scrimping someplace so you can manage to purchase the book if you are trying to pay off debt and get back on your feet.

Dave recommends something called “the Snowball Method” for repaying debt quickly. Imagine a snowball at the top of a hill.  As you roll the snowball, you pick up more snow, and the snowball gets bigger. By the time it’s at the bottom of the hill, it’s huge. You can do the same thing with debt by paying off the smallest bill first, then applying what you’d normally pay on that lowest bill to the next bill. Continue adding the minimum payment for each paid-off bill to the next largest one until all of your debt is repaid.

This method assumes you have enough money coming in to make your basic payments, plus a little bit extra. If you’re in a situation in which you truly do not have enough money to pay your bills, this article will be more appropriate.

I have personally used this technique to attack debt, with a few tweaks of my own.

Here’s a more detailed explanation of how the Snowball Method works.

1.) Write down every penny you owe.  This is tough love, and it’s painful, but go through all your bills and write down your totals. Most people find that the total is higher than they expected. The good news is, if you are truly committed to paying off your debt, this is the highest that it will be.

2.) Organize the bills from smallest to largest amounts.  This may not seem like it makes much sense, but trust me…there’s a method to the madness here.

3.) Write another list of the minimum payments for each bill. This is your baseline of payments each month. For the sake of ease, let’s say there are ten bills with a total of $750 in monthly minimum payments.

4.) Now, figure out the rest of your budget. Once you pay your rent/mortgage, buy groceries, and pay the utility bills, how much money do you have on top of your $750 a month?  For this exercise, we’ll say you have an extra hundred dollars.

5.) Your worksheet might look something like this:

6.) Now, you’re going to start putting all of your extra money on the lowest bill each month. So, the first month, you make all of your minimum payments, put $80 extra on the Victoria’s Secret bill to pay it off, and then apply your leftover $20 to the JC Penney’s bill.

7.) The following month, take the minimum payment from Victoria’s Secret, the minimum from JC Penney’s, and your extra $100 to pay off your JC Penney’s debt. Keep in mind that due to interest, your other debts will not change much at all if you are only making the minimum payment. For the sake of this exercise, we’re living them as they are to demonstrate that.

8.) The month after that, you’ll combine all of your previous minimum payments with your extra hundred dollars, plus the minimum for Target for a total of $185 against that bill. It will take you two months of snowballing to pay this off.

And that’s how you pay off consumer debt quickly.

Do you get the idea? Instead of flailing away with minimum payments and a little extra when you can, make a concrete plan to take down debt as fast as possible. It can feel strange to only make minimum payments on the larger debts, but trust me, this is much more efficient than just paying a little extra here and there. If you get new windfalls while you’re paying off debt, like tax returns or bonuses, apply them to your smallest bills.

Sometimes we get into debt due to bad decisions and sometimes it’s out of desperation. If you have ever been without money for groceries or utilities, you may have used a credit card even though you knew it wasn’t a good idea. Maybe you had a great income when you incurred the debt but then lost your job. There are many reasons you could find yourself way over your head. That’s all in the past. Don’t beat yourself up, because that’s ultimately counterproductive. Just commit to getting out of debt as quickly as you can and do you best to avoid the same pitfall in the future.

Here are some resources to help you get control of your finances:

• The Total Money Makeover
• Without an Emergency Fund, You Are One Missed Paycheck from Disaster
• It’s Time for a Personal Audit of Your Frugal Living Budget
• How to Survive When You Can’t Pay Your Bills
• The Complete Tightwad Gazette