Debt Snowball

You have most likely seen cartoons of a snowball rolling down a snow covered mountain getting bigger and bigger as it goes.

Normally the cartoon characters are part of the snowball and are screaming for their lives. If you have consumer debt you may also be screaming to get your life back. Well that’s what the debt snowball is all about, getting your life back so you are no longer a slave to your creditors.

The debt snowball is a very simple concept. You list your debts smallest to largest and pay them off in that order. The snowball affect occurs once you have paid off the first debt. You can then use the payments you were making toward the smallest debt and put it toward paying off the next smallest debt.

As you pay off one debt the amount you can put toward the next debt increases and therefore accelerates the process each time you pay another debt off, until you get to the final debt. At that stage you are paying your total budgeted debt repayment amount toward a single debt.

If you put any savings from other spending categories toward the debt as well you could have this debt monkey off your back in no time.

If you find you are not making any progress on the Debt Snowball (you are not clearing any debts), you may need to consider working your budget harder to free up some more cash from other spending areas, sell some items or increase your income by doing some overtime or getting a second job.

Sounds like hard work but it is all worth it in the end. When you hit the bottom of the Debt Snowball mountain and, just as the cartoon characters do, the snowball smashes and you celebrate never having to go into debt ever again.

Shouldn’t I pay the highest interest rate first rather than the smallest balance?

You may be asking why we recommend paying off the debt from smallest to largest rather than starting with the highest interest rate debt. Paying the highest interest rate first may save on interest but personal finance is not strictly a numbers game.

It is more about behaviours than pure math. We find that the slightly higher amount of interest you may pay by focusing on the smallest debt first is more than outweighed by the motivation you get by seeing debts totally paid off.

If you start to weed a garden and, rather than completing small sections at a time, you randomly pull out weeds here and there throughout the whole garden, you will stand up, arch our aching back, look at the garden and see no or little result for your work and give up.

Alternatively, if you start with a small section of the garden and completely eradicate all weeds within that section you can stand up be encourage that you are progressing and get back down on your knees and start the next section.

Excerpts from Living in Financial Freedom
Focus on the Family Australia 2010