Financial advisor Dave Ramsey popularized the "Debt Snowball" program for people trying to get out of debt. The program is based on the concept of building momentum with extra payments by adding the previous payment on debts you have paid off to the next debt on your list. Soon you will be making very large extra payments on your biggest debts, and the successes of paying off your smaller debts help you build emotional momentum as well.
Stop Accumulating Debt
Before starting the debt snowball program, you need to make two major changes in the way you handle your finances. The first is to stop using credit cards and other forms of short-term debt. The snowball program will not work if you keep adding to your debts. The second is to put away $1,000 in a savings account for emergencies. This will allow you to not use your credit card if you have an emergency such as needing car repairs on your primary vehicle.
Equal Monthly Payments
The key to the debt snowball program is that your total debt payments are equal every month, even when you have paid off some of your cards and your minimum payments go down. The payment amount above the minimum is your snowball, and it keeps getting bigger as you pay off debts. For example, if you start the debt snowball program with three credit cards, one with a minimum payment of $40, one with $100 and one with $160, you will pay $300 every month toward your debts. After you pay off the first card, you can put $140 per month toward your second card. After the second is paid off, you get to put the full $300 per month toward the last card, which greatly accelerates its payoff.
Tighten Your Budget
The debt snowball program will work more quickly if you can start with a total payment amount even greater than the sum of your minimum payments. Reducing your other household expenses with methods such as eating out less frequently than usual or canceling your cable television service can free up more money in your budget to put toward your debts. If, in the above example, you decided to put $400 per month toward debts instead of $300, you could start with an extra payment "snowball" of $100. This would bring your payments on the first card with a $40 minimum payment to $140 per month and help you pay that card off much more quickly, not to mention the others as well once that snowball was applied to them.
Make Lists on Paper
When you first start a debt snowball plan, you need to make a list of all of your debts, starting with the smallest amounts owed at the top of the list. You also should write down the minimum payment for each debt. As you pay off a debt, you cross it off the list. Although you can make these lists on the computer, making them on paper is even better because you can post them in a place where you see them regularly. Seeing the plan and seeing debts get crossed off the list help motivate you to keep making your extra snowball payments on the debts. Much of the snowball program is based on the emotional momentum of paying off your debts.
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