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

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.

Understanding the “Debt Snowball”

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.

How to Set-Up A Debt Snowball

1. Find the interest rate, minimum payment, and outstanding balance of every debt you have

You should be able to get this information from the last statement of each of these bills.

2. 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.

3. 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.

4. 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.

5. Figure out 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.

6. 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.

7. Use this total number instead of the individual minimum payments

Your “debt bill” is now this number.

8. Make minimum payments on all but the top bill on your list

For that one remaining bill, write a check for the remainder of the money you put aside for debt that month.

9. Repeat this exact bill paying procedure

Don’t change 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.

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.