If you’re a Dave Ramsey fan, you know that he uses the “snowball method” to help teach you how to pay off your debt. For new families following his financial teachings though, understanding the way the snowball works can be confusing and overwhelming. But it really isn’t though and once you have it down, you can rock it all the way to your debt free scream. Take a look at Dave Ramsey’s Debt Snowball Method explained and then get started on throwing your own snowballs! This is Baby Step number 2, be sure to check out the Total Money Makeover book from Dave Ramsey if you haven’t yet and our post on the 7 Baby Steps.
To start, be sure that you have completed Dave’s first baby step by funding your baby emergency fund with $1,000. (see ways to find that in our Ways To Build Your Emergency Fund) You shouldn’t move onto paying your debt off until you have it ready to go in case you need it. Then, you will obviously need to know what debt you actually have. Take them and list them smallest to largest. This is the order in which you will pay them. Even a $5.00 debt is too much so be sure that you list them all. You’ll also want to note what the minimum payments are for any installment payments you have such as a credit card, car payment or student loan.
Once you have your debts listed, you will continue to make the minimum payment on the installments you have just as you are now. The catch is though that whenever you get extra money, you pay those smaller debts off. Say you earn $50 from a yard sale, use that $50 to pay off a small debt or two. If you sell your second car? Use that money to pay off those smaller debts.
Once the smaller debts are out of the way, it’s time to start tackling the larger ones. Again, continue to pay the minimum payments as required, but now? When you get extra money? Use it to pay off the smaller installment payment down. Every spare dime you have should go to that smaller payment…
i.e….throw snowballs at it. Those $20 and $30 payments are your snowballs. You will be surprised, very quickly at just how much “damage” those payments can do for your loan amount and at just how quickly you are out from under that one debt.
Got that first, smaller installment paid off? GREAT!! Now is when you will really get the snowball rolling!
Remember that minimum payment you had for the smaller loan? No, you’re not done paying that money out just yet! You’re going to move that money up to the next debt and keep paying the minimum payment! After doing this once or twice you will have a ladder created so to speak. Confused? Let’s take a look:
Credit Card A: $50/mo minimum payment
Student Loan A: $90.00 minimum payment
Car Loan B: $250 minimum payment
When the credit card is paid off, you will move that $50 payment to your student loan meaning you will be paying $140/mo on your student loan. Student loan paid? Move that $140/mo to the car loan to pay a total of $390 on the car loan.
Do you see the snowball rolling down the hill? Picking up debris (and in your case debt) as it rolls?
Of course, you’ll also still be throwing any extra cash you have on that debt. Those little snowflakes are the foundation of helping to pay your debt down. After you get into the swing of things, you’ll find that the Snowball Method really does work and it works amazingly well!
What have you done to get money to start your snowball and keep it rolling?