Being debt free is a pipe dream for most people. While it sounds nice, in reality, many people rarely take the time and do the planning that’s needed to enjoy a life without a single debt payment. But, freeing up hundreds if not thousands of dollars each month is possible.
There’s no wrong way to pay off debt, but there are methods that have proven to be more effective than others. If you’re looking for a way to live life debt free, consider using the debt snowball plan.
Keep reading to learn the details of this method of paying off debt and enjoying financial independence.
What is the Debt Snowball Plan?
Knowing how to get out of debt faster is a great way to improve your financial situation, allowing you to have access to more money that can be put into savings, retirement, or an emergency fund. One of the best ways to quickly pay off debt is to use the debt snowball method. The method was created by Dave Ramsey, entrepreneur and personal finance guru.
Using the snowball payment, you will continue to make payments towards all of your debt, but your smallest debt will be given top priority. By paying off your smallest debt first, you’ll gain momentum, just as a snowball does as it rolls down a hill and picks up more snow.
Once your smallest debt is paid off, you’ll roll the money you were paying on that debt into the next smallest debt balance. You will continue to roll money onto your next smallest debt balance until all of your debt is completely paid off.
How to Use the Plan
In order for the debt snowball plan to be successful, there are several steps you need to take so that you have a solid foundation to build upon.
To start, you’ll need to make a list of all of your debt, to include loans, mortgages, and credit cards. When listing your debt, the only number you care about is the total debt balance. Once all of your debt is listed, prioritize it based on the debt balance, sorting from smallest to largest.
By ranking your debt based on the total balance, you can have a clear plan as to what debt you need to pay off first. Let’s assume you have a credit card with a $2,000 balance, a personal loan with a $5,000 balance, and another credit card with a $500 balance. Using the snowball plan method, you’ll want to pay off the $500 credit card first.
Once you have a list of which debt to tackle first, you’ll want to make minimum payments on all debts, except the smallest. For the smallest debt balance, you’ll want to pay as much as possible towards that debt until it’s paid off. You can put more money towards debt by cutting spending elsewhere or by making more income. To reduce the amount of money you spend, consider:
- Making meals at home
- Using public transportation
- Opting for free entertainment
- Bundling services
- Canceling services you no longer use
To increase your income, which increases the money you have available to put towards your smallest debt, consider selling unwanted household items, working a part-time job, or finding a side hustle.
Once your smallest debt has been paid off, move to your next smallest debt balance. Carry over the money you were paying towards the original smallest debt, which in essence allows you to snowball payments.
Benefits of the Debt Snowball Plan
One of the biggest benefits of this method of paying off debt is the enthusiasm it builds. There’s no better feeling than seeing a loan or credit card be paid off. It feels good to pay off debt and in turn, these feelings act as strong encouragement to pay off the next loan.
The snowball method is focused any provides notable progress. This can be helpful for people who have a lot of debt and have made very little leeway with paying it off in the past.
Another benefit of the debt snowball plan is that it teaches sound financial decisions. When using this plan you have to create a budget. You also have to find ways to minimize spending while also finding methods to increase your income. These are all financial habits that will serve you well long into the future.
There are many different methods that you can use to become debt free. One of the most effective and result-driven options is the debt snowball plan. Though using this plan requires meticulous planning and smart financial decisions, it’s an effective way to pay off debt quickly.