The Debt Snowball

Last week I covered Baby Step 1: The $1000 Emergency Fund. That step can usually be completed in a month or so, depending on your situation. From there, you move on to what really is the core of “the plan”–The Debt Snowball.

In the debt snowball, you take all of your debts and list them smallest balance to largest balance. ALL OF THEM. This includes the twenty bucks you borrowed from your fishing buddy. It includes the $75 you owe your dentist for the cleaning two months ago. It includes your cars, motorcycles, and boats. Store cards, credit cards, and loans from parents. Everything.

Interest rates only matter as a tiebreaker. The reason you do it this way is entirely psychological: reducing the number of creditors is a better positive reinforcement than reducing your total debt. If you pay off $1000 of debt and get rid of two store cards you feel like you’ve made a whole lot more progress than if you pay off $1000 on an account and you still owe $7500. Going from 7 creditors to 5 within the first month is an awesome feeling.

Okay, so how does this work? Well, you take your ordered list of debts and you pay minimum payments on all of them. Except the smallest one. That little bugger? You’re trying to murder him. Kill him with fire! Any extra money you have in the budget (you do have a budget, don’t you?) goes to kill him. Every bit of overtime goes on that guy. If you sold an extra rifle you put that money on the smallest debt (Later, you can buy a new one. I hear they keep making them).

When that guy is dead, you move up the chain. Only this one will go a bit faster, because you don’t have that first debt’s monthly payment anymore. So if you had a Visa with a $25 minimum payment as your first debt, and a Discover with a $45 minimum, your new absolute lowest payment you’ll make on the discover is $70. Make sense?

By the time you get to the last debt, you could very well be paying thousands of dollars every month on it without having changed your lifestyle very much since the beginning. When I was single, I paid about $1600/month on my student loans at the end, which was about half my take home pay. I think the number was close to $3500 at the end of my wife’s snowball.

This step will take 18-24 months on average. I did it in 30 months when I was single and we paid off my wife’s debts 28 months after we got married (our debts were roughly equivalent and for the same things).

5 comments to The Debt Snowball

  • Ted N

    It’s working, and it’s pretty awesome! Had to pull a mutual fund that was slowly dying, lost some money on that, but made an old credit card that AwesomeWife had, until recently, lost track of, go away. Pulled retirement money, lost a little bit of money on that, and paid off everything except for the last 300 dollars and 5000 dollars of two hospital bills (AwesomeWife, then AwesomeGF, didn’t have insurance, I made too much for her to qualify for any help, life sucks, oh well). The 300 is paid off in Dec, and the 5000 is getting paid 200/mo. until it’s done. That all opened up a bit of money to up the payments on the cars, they’ve got 6 and 7 months left.

    Budgets and getting into better financial shape is pretty dang cool.

  • Ted N

    Also, your posts, among others pushed me to get up and dig out the bills, sort it all out and get it taken care of.


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