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Myth: You need to pay off the debt with the highest interest rate first to get out of debt quickly.
Truth: You should knock out the smallest debt first to create momentum in your debt snowball.
What Is the Debt Snowball Method?
The debt snowball is a method designed to help you stay motivated while paying off your debt by starting with the smallest debt and working your way up to the largest.
Mathematically, it makes sense to pay on the debt with the highest interest rate first. After all, doesn’t that save you the most money?
Maybe. But if you begin with the biggest one, you might think you’re not making fast enough progress, lose steam and quit before you’re done. It’s important to pay your debts in a way that keeps you motivated until you’ve wiped them all out. Those quick wins will pump you up!
And they happen when you start with the smallest debt. Once you’ve saved your $1,000 starter emergency fund, list all your debts (except the house) smallest to largest. Now it’s time to get rid of them ASAP with the debt snowball.
How the Debt Snowball Works
Make minimum payments on all debts except the smallest—throw as much money as you can at that one. Once that debt is gone, take its payment and apply it to the next smallest debt, continuing to make minimum payments on the rest. Repeat that as you plow your way through your debts. The more you pay off, the more your freed-up money grows—like a snowball rolling downhill.
Here’s a quick example. Say your debt snowball looks like this:
- Credit card 1: $500 at 13% with a monthly payment of $25.
- Credit card 2: $1,000 at 19% with a monthly payment of $50.
- Car loan: $6,000 at 4% over four years with a monthly payment of $135.
- Student loan: $15,000 at 5% over 10 years with a monthly payment of $159.
If you pay the minimums on everything and add an extra $100 to the smallest credit card payment, you’ll pay it off in four months. Then you can attack the second credit card to the tune of $175 per month ($100 plus the newly freed-up $25, plus the $50 payment you’re already making). That one will be gone in five months. Now you have $310 a month ($175 plus $135) to put toward the car! At that rate, the car loan will hit the road in 15 months!
By the time you get to the student loan, you’ll be paying $469 on it each month! You’ll wave goodbye to Sallie Mae in another 24 months and be totally out of debt.
That’s what happens when you have focused intensity and start with your smallest debt—it leads to big results!
Focused intensity, starting with your smallest debt, leads to a big result!
You CAN be debt-free! And the debt snowball is just part of the plan you need to take control of your money. Get started with Financial Peace University!
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