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.