The Debt Snowball is one of the most talked about methods for paying off debt, although there’s some disagreement about one of the basic premises of the Debt Snowball – whether to start paying off the smallest debt first or the one with the highest interest rate. I tend to prefer the method of starting with the highest interest rate first because you will save more money, but in some situations, starting with the smallest debt first can provide an emotional boost to the individual or the family that is paying down the debt.

The Debt Snowball works in the following way:

List all of your debts, in descending order by interest rate, regardless of the balance (accounts with highest interest rates first).  Determine the maximum amount of money, based on your budget that you can apply toward paying down debt each and every month.

Each month, apply the minimum payment PLUS the extra money you’ve made available from your budget to the first debt (the one with the highest interest rate). Pay only the minimum payments on the other debts.  Continue to do this until the first debt on the list is paid off.

Take the minimum payment AND the extra payment you were making on the first debt and add them to the minimum payment you’ve been paying on the second debt. Pay that amount on the second debt each month until it’s paid off, then move on to the third debt. Continue to pay only the minimum payment on all debts except the one you’re “snowballing.”

Repeat this process until all of the debts are paid off.

It doesn’t take long before the payment you’re making on the targeted debt becomes quite large, as you add the payments you were making to all the other accounts (that you’ve now paid off) to the payment on the debt you’re now focusing on. Your cash flow remains the same throughout the process but the monthly payment you make to the targeted debt grows larger and larger.

That’s it.  There isn’t anything else to it.  It is just a matter of creating a realistic budget, determine the amount of money that you can apply toward this and get the ball rolling down hill so to speak.  This approach will obviously only work if you can afford to pay more than your monthly minimum payments.  If you are financially unable to pay more than the monthly minimum payments on your debts, you will have to look at other, more aggressive ways to get out of debt.  You should look into credit counseling and debt settlement if the debt snowball approach is not within your financial reality.

Related posts:

1. Debt Snowball – When does it make sense?
2. Get Out of Debt – What Strategy Makes the Most Sense?
3. Chase forcing more consumers to turn to Debt Settlement or Bankruptcy
4. Personal Bankruptcy filings are up 40% from this time last year
5. Options