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Snowballing your debt may not the most logical choice, but many would argue that it is the best choice.  Logic would tell you to pay off the highest interest rate loans first. However, in practice many people find it is easier to pay off the smallest balance first.  The administrative burden of carrying the debt, watching it, and remembering to pay on time is eliminated more quickly by paying off the smallest balance first.  This also begins to free up your cash flow more quickly with the smaller balance loans.

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Live frugally by saving interest charges on debt.  Pay it off using the snowball approach.

Creating a Debt Snowball

One day it just happens.  You open up all your bank and credit card statements and realize things are out of control. Debt is piling up.  You've got multiple balances with different companies and different interest rates.

Sometimes, this can be out of your control.  It might be medical bills or an underwater mortgage.  In some cases, it could be out of control spending. Whatever the reasons for your large debts, a debt snowball is a simple way to get things paid off.

A debt snowball works by combining effort with increasingly powerful results that snowball into a force that cannot be stopped.  Like a snowball rolling down a hill, it gathers more and more momentum to reach the ultimate goal, which is being debt free.

The beginning step is to get a full understanding of the problem.  When you are sick and go to the doctor, the first thing that they do is check your basic biometric readings.  Body temperature, pulse, blood pressure, height, and weight are all factors that relate to your physical health.

Your financial health is also just as measurable.  Creating a cash flow statement that shows your cash inflows and outflows helps you to understand where you are spending your money.  A balance sheet will help you to build a list of all your assets and debts, as well.

What is your Total Debt Number?

Make a list of all your different debt accounts, using your handy pencil (with an eraser, just in case) and a piece of paper.  Go through your bank statement to make sure you are capturing all the places you are sending your money, so that you don't forget one or two debts that could slip your mind.  Once you have that list complete, order the list from smallest to largest.   This is the order in which you will be paying off your loans.

This is where the debt snowball approach differs from so many others.  Some people may tell you that it is most logical to list your debts by the highest interest cost first and pay these off before the others.  This is logical, but it ignores a basic fact about human psychology.  Humans need to feel and see their progress towards a given goal.  Without that, they will give up.

The debt snowball is an incremental process.  In the first month, you use a zero based budget to eliminate unnecessary spending. Then, you apply all remaining funds to pay off your smallest debt.  You do this over and over again, consistently, month after month, until the smallest debt is paid.  Once that is complete, you take the money that you would be sending to the old debt and apply it to the next largest debt.  You will notice that this monthly payment starts to get larger and larger.  Each time you pay down a loan, your available cash flow increases.  This is the beauty of a snowball approach, you build momentum with each passing month.