Follow these 5 simple steps to get the Debt Snowball working for you:
1. Gather the paperwork for all of your debts- Those who have financial problems are often disorganized, so this step may be a challenge for some, but it’s well worth it. Many also may avoid this step out of fear of finding out their true financial condition, but the first step is to take control of your financial future by finding out where you’re truly at.
2. Make minimum payments on your debts- This may seem counter intuitive, but the next step is to start making the minimum payment on all of your debts. The point of this step is to free up as much money as possible, because you’re going to need it. Also consider cutting back on unnecessary expenses so you can maximize the power of the debt snowball.
3. Take the extra money and payoff your smallest debt- As you pay minimum payments on all of your debts and try to free up as much money as possible, remember that the purpose of doing this is to take that money and pay off the smallest debt. Many people provide counter arguments to this strategy by claiming that you should pay off the debt with the highest interest rate first. While this definitely makes mathematical sense, it doesn’t make the most sense in the world of personal finance, as we’ll find out shortly.
4. Don’t let off the accelerator until you pay off the smallest debt- One of the keys to this strategy is intensity, as this intensity will shorten the time frame required to pay off all of your debts.
5. Start working on your new “smallest debt”- Once you’ve paid off your smallest debt, you’ll notice an excitement building, which is the reason why we pay off the smallest debt first as opposed to the one with the highest interest rate. This excitement will keep you on the path, whereas you may lose heart if paying off the debt with the highest interest rate becomes overwhelming due to the size of the loan. For this reason, move onto the next smallest debt and repeat the process until you’re debt free!