Imagine yourself looking at the money in your bank account. You have no monthly housing payment. No student loan payment. Your car is paid off. All you pay for monthly is your phone, utilities, food, and your “want” list. You must think that I am crazy. But this is my goal by 25. Debt paid off. House paid for without a mortgage. Money in the bank.
Many people love the idea of being debt free, but once they start looking at their bills, they have no idea where to even start. Or, they are so overwhelmed with just the monthly payments that they can’t even imagine paying more on any of the debts.
Whatever your case is, if you want to be debt free, you will find a way to do it! I am on a one person income and slowly but surely working my way to being debt free!
If you are a Dave Ramsey follower, then you have heard of the Debt Snowball. Some people have heard of it other places as well. In my opinion, it is one of the best ways to keep the motivation to get debt free! The snowball isn’t directly Dave Ramsey’s, but it is the system that he uses in his Financial Peace University.
The other day I read a Dave Ramsey quote on Instagram about the “Debt Snowball” that said “It isn’t about the math, it is about the momentum.” This is such a good thing to keep in mind when starting out. Don’t get caught up in the fear of paying a little more interest of some of your bigger debts when you could completely pay off some of your smaller ones. The whole purpose of the snowball is to clear smaller debts to give you more money towards your bigger ones, like a snowball rolling downhill. There are definitely other methods to paying off debt, so do your research and do what is best for you.
I chose the snowball method because I paid off little debts and just have a few larger ones left. It helps gain momentum and it allows you to put more towards those larger debts. I didn’t see a lot of point in throwing so much money towards a large debt when I could completely knock out the small ones all together.
6 Steps to Building your Debt Snowball
Get on board with being Debt Free
If you are half in, this won’t work for you. If you are 100% in, you will see results quickly. The more momentum and excitement that you have towards getting debt free, the more likely it is to actually happen. If you are half in on this change, it will work for a little while, but the chance of you succeeding or staying debt free is going to be a lot lower.
Dave Ramsey says that you need to get mad about your debt. Get mad at your situation and find a reason to change your life. By living debt free, you open doors that have never been opened before. So GET EXCITED! I know I am!
Part of getting on board is creating goals for yourself and telling everyone. Set a “Debt free date” that you want to have everything paid off by. Set mini goals of how much you want to pay off every month. Post your goals everywhere! I have mine at my desk at work, on my fridge, in front of my home desk. Everywhere.
Stop getting in more debt.
Once you decide to get out of debt, it doesn’t make sense to keep spending on your credit cards. It wouldn’t make sense to try climbing out of a whole while you are still digging the whole. So quit digging your debt deeper than it already is.
This is where your budget is SUPER important. I am not saying that it is impossible to follow thing journey without a budget, but I can’t imagine all my bills getting paid AND getting out of debt. If you don’t have a budget, read my guide on how to start budgeting.
Cut up the credit cards. Get rid of them completely. Freeze them in ice. Whatever you have to do, just stop using them! I do not recommend you to try consolidate your debt. It may work for some people, but it doesn’t work for very many.
List every single debt you have.
This honestly may be the most terrifying part of the entire debt free journey. When you start figuring out how much you actually owe in debt, it can be pretty brutal. Whether it be a family loan, car loan, credit card, you can’t be afraid to lay it all out in front of you. In this case, it is better to know where you are starting. When you list them, write down the interest rate, total balance, monthly minimum payment. Total up every debt from every account that you owe on.
After you see what you owe, it is easier to figure out what you are going to have to do to get debt free. It definitely isn’t easy and to be honest, it is actually super hard. But it is worth it.
If you are having second thoughts after you total up your debts, read my post on Why You Shouldn’t Start Your Debt Free Journey. Then come back to this.
Make minimum payments on everything, except your smallest debt.
When you are making minimum payments on everything, you are keeping each account current and slowly working them down. Putting any extra cash towards your smallest debt will help pay that one off faster. Once you have the smallest debt paid off, start putting all of your extra money towards the next smallest. Soon you will have created a snowball effect with your minimum payments. Before you know it, you will be putting all of your extra cash towards your largest debts and they will be gone before you know it.
I will admit that I put a few extra dollars towards my bigger debts because I like even numbers. It also puts more toward the principle balance when I am paying the bigger ones.
Here is an example:
Credit Card: $350 : Minimum Payment $35
Student Loan: $1000: Minimum Payment $20
Car Payment: $4,000: Minimum Payment: $120
Let’s say that during the first month of your snowball, you have $300 to put towards your debts. You would pay the minimum payments on everything and put the extra $130 towards your credit card. For ease of the example, they all earn $2 interest a month.
The second month, you sold some stuff have have $400 to put towards your debts. Congrats! Your credit card is now paid off in full! And you still have $73 extra dollars left over to put towards your student loan.
I am sure you get the point. Now that the credit card is paid off, you would combine your credit card minimum payment ($35) and automatically apply that with your student loan minimum ($20). This is where the snowball effect comes in. You are now putting a minimum of $55 a month towards your student loan and you will see progress a lot sooner than you would with just the minimum payments!
Start Finding Extra Money
While just making the minimum payments on everything is going to get them paid off eventually, the faster you pay off the smaller debts, the better your chances of making it through to the last one. If a snowball is rolling down a hill slowly, it will still gather snow, but it may not be as noticeable.
The momentum of paying off the smaller debts is one of the best ways to trick your mind into getting excited about it. Debt isn’t an exciting topic, but it will be exciting to curl up on your couch in your paid off home.
Things will come up that cause you to stand still, but that is what the emergency fund that you built is for. It ensures that you don’t have to take out anymore debt along the way.
If you can sell belongings, get a side job, or start finding other ways to cut your budget, you will notice a huge change in your debt quickly. I make extra payments every month to help get there faster. In June, I paid off over $1,500, even though my minimum payments were less than $300.
I promise you that people will think you are crazy. People will tell you that it isn’t a good idea to pay off all your debt because “credit is king.” But once people start seeing how you are doing and how quickly it is all going way, they will start asking how instead of why.
As I’ve said, this isn’t an easy journey and it isn’t one that most people would go on willingly at first, but once you realize how great it will be to live completely debt free, it is 100% worth it. Once my student loans are gone and I have a house that is paid for, I will be able to work mostly from home because I will have very few monthly expenses. I can’t wait for the day that I get to completely enjoy my paid for home.