The One Hour Project: Construct Your Debt Snowball (Or Something Like It)

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This post is part of The One Hour Project, in which you can spend just one hour to put your finances in a better place without a big lifestyle change, through frugality or other financial choices.

If you’ve gone through even a few of the one hour projects in this series, you likely have some more money in your pocket. Don’t rush out and spend that jingle – instead, use that jingle to repay your debts, even if it’s just a few dollars a month.

Here’s how the debt snowball idea works. A debt snowball (or similar arrangement) is simply a debt repayment plan that specifies the order in which you should pay off your debts. Typically, there is some logic in the order – in Dave Ramsey’s original debt snowball, the debts were ordered from smallest to largest, for example. You then add up the minimum payments for this snowball, add an additional amount to that total, and then treat that dollar amount as your “debt bill” for the month.

From this “debt bill,” you make the minimum payments on all of your debts, then use the remainder to make extra payment on whichever debt is on top of the list. When that one is paid off, you don’t reduce the total of your “debt bill” – instead, you just have a larger remainder to tackle whatever debt is now on top of the list. Eventually, you’ll be using the whole “debt bill” amount to tackle that final debt – and it will melt away quite quickly.

If you’re spending less than you make but you still have a lot of debt to tackle, a debt snowball is a great thing to start. It commits you to actually getting rid of your debts – and debt freedom is a beautiful place to be.

How do you set this up? It’s pretty easy – all you need is either a piece of paper or a spreadsheet. Here’s the game plan.

First, find the interest rate, minimum payment, and outstanding balance of every outstanding debt you have. You should be able to get this information from the last statement of each of these bills.

Next, sort these bills. I recommend sorting them by interest rate, with the highest one on top. Another method is to sort them by the outstanding balance, with the smallest one on top. What you’re doing here is figuring out the order you’d like to see these debts gone.

Now, list the debts along with their minimum payment in the order you sorted them. You’re going to add up the minimum payments, so keep them in a nice column so you can easily add them up.

When you have them all listed, add up the minimum payments. This should give you a nice fat number – that’s how much of your income each month goes to paying off stuff you had to have before you could afford it. It’s a number that you want to knock down to zero.

At this point, you need to take a look at how much you spend overall each month. How much extra can you squeeze out? If you’ve been doing the one hour projects, you’ll probably be able to squeeze out at least a little. Commit yourself to spending a certain extra amount each month to getting yourself debt free.

Add this number to your minimum payments. This is how much you’re going to commit to your debt each month. I found it psychologically useful to find that number I was comfortable with, then rounding it up to a larger number, a nice even target for each month.

When you figure up your bills, use this total number instead of the individual minimum payments. Your “debt bill” is now this number.

When you sit down to pay the bills, make minimum payments on all but the top bill on your list. Then, for that one remaining bill, write a check for the remainder of the money you put aside for debt that month.

Repeat this exact bill paying procedure without changing the total amount you’re putting aside each month until your debts are gone. Obviously, you may want to refigure things if a major life change occurs, but unless something really big happens, stick to the snowball. It will get you out of debt.

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12 thoughts on “The One Hour Project: Construct Your Debt Snowball (Or Something Like It)

  1. Once I got out of debt, I continued to use this method for my savings goals. I prioritized my goals (fully fund emergency fund, save up for new (to me) car), fully fund Roth, save up for my stint in school) and applied my ‘debt payments’ towards my savings goals. If I don’t use this method, I find that I don’t save as much and flounder.

  2. This has been referenced in several posts as of late. Adaptiing it to pay off the higher interest rate first seems to make more sense to me but I have actually run any numbers. Has anyone else worked with that kind of scenario and crunched the numbers?

    (I have no debt so my motivation in this area is a little laxI will admit)

  3. The debt snowball really, really works. I started with the smallest balances first in order to get some psychological momentum going (Dave Ramsey’s approach) and because fewer bills lessened the chance of an “Oops” in terms of forgetting something or being late. After I cleaned up these smaller debts, I got super aggressive with a high interest debt. Between the minimum “debt bill” that Trent talks about, plus the “extra” money I was finding, I was knocking down my debt with roughly 50% of my takehome pay. Now, like Sense above, I’ve rolled those former debt payments into savings goals.

    Paying off the debt taught me how little I really NEED and forced me to realize how much money I had frittered away over the years. As great as it was to see the balances due go down, it’s even more fun to see the savings and investment balances go up.

    Prairie

  4. Just also don’t forget to stop accruing the debt too. If you’re putting $100 into paying off one debt and creating a new $100 debt somewhere else you’re not achieving anything.

  5. The debt snowball method is what I am adopting now to clear my debts of which I am tracking online. Apart from trying to save on other areas, I am also looking add on extra revenue online to help in my efforts. Great post.

  6. This speaks to me because I’ve been unable to resist paying a little more (notice I said “a little more,” not doubling payments—–I mean maybe $25 more tops) on all my cards and since I am in a huge hole of debt with not enough income to do more than tread water, this is not serving me well. I need to take a deep breath and pay just the minimum on all but one card & apply what gravy I can scrounge up toward either the smallest amount owed or the highest-interest-rate balance. I’ve read where even if you pay just $5 more on a card, the bank sees that as “trying” to pay down your debt; I’ve also heard from one major bank that the point is to get the debt paid off, and if you can’t afford to pay anything but the minimum, they do not penalize you (i.e. they don’t interpret the minimum-only payment as meaning that you are not “trying”). It’s hard to know what to believe. I’ll print out Trent’s steps, though,and take a crack at that method.

  7. I find it works better for me psychologically to pay down the highest interest rate debt first. I know that Dave Ramsey suggests paying down the smallest amount first for psychological reasons but it isn’t as satisfying to do it that way for me and I don’t get that momentum going that he talks about because the high interest one is still haunting me. So, slightly different approach, but ultimately same results.

  8. The only problem I have with the snowball approach is that I am paid weekly and I never have one big chunk of money. So I pay different bills on different weeks by their due dates. I am paying much more than the minimum on each (about 5 cards), and I do concentrate on paying the lowest balances first.

  9. I’m posting as one of the other posters mentioned that this post was showing up again frequently referenced in newer posts and thought I’d add my $0.03 (inflation adjusted).

    My wife and I just finished creating our debt snowball. The way that I’m going to start it rolling in January 2008 is with our web banking. If anybody is interested in reading about that you can see the description I posted today here:
    http://www.gearhartav.com/andrew/blog/2007/12/our-debt-snowball.html

  10. Trent, why don’t you write about an asset snowball as well? Considering that it is a more apt use of the word snowball (implying growth rather than diminishment) and many of us aren’t in debt.

  11. After 2 mortgages, car payment, electric, water, heat etc, there is no money left..
    Barely can afford food for 5 people…

    It’s not so much that we have credit card debt, but more to the point of after we pay the necessary bills, there is simply not enough to pay any other bills.

    Any advice? (Note: We can’t refinance any more, or “consolidate”… multiple payments have been missed and credit does not allow us to do so)

  12. @Alyssa

    First: Go to the library and read Dave Ramsey’s book Total Money Makeover. It totally changed the way I look at my debt.

    Next: Get rid of your car payments – this one is really tough. Sell your car and buy a cheap reliable car, or use public transportation. If you really want to get out of debt, it will take a lot of effort on your part. The extra money that you have from a cheaper or non-existent car payment you can then use towards the snowball.

    I am currently working on my snowball and have had to squeeze my budget very tight, but in a few more years my only debt will be my mortgage.

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