What is the Debt Snowball Debt Reduction Plan?

By Mark Loy

The only criticism toward Dave Ramsey's method for achieving financial peace is that it is to conservative. It would seem that this could be agreed upon but unfortunately most American's do not have the discipline that it takes to pay off their credit card every month and the result is Dave Ramsey's extremely conservative approach to debt.

This article will be going into detail about the debt snowball method of paying of debts. The debt snowball method for paying off your debts is probably the most basic and most important step in someone's quest for financial peace.

When implementing the debt snowball method the plan is to organize your debts so that you can setup and easy, manageable, and results oriented plan for paying off your debts. The debts to pay off include credit cards, car loans, student loans, pay day loans, and personal loans. It essentially includes any debt that you have aside from home mortgage.

The first part of the debt snowball plan is to setup a spreadsheet that lists all of your debts in order from the smallest to the largest. After creating this list you need to put as much of your monthly income as possible toward paying off your debts. After determining how much you can put toward your debts you then need to determine how much your payment should be on each account. In the debt snowball plan you will pay only the minimum payment on each debt you have, except for the one with the lowest balance (at the top of your list).

When you do this it will allow you to pay off the smallest debt very quickly and then move on to the second smallest debt. When you move to the second smallest debt you then allocate everything to that debt that was originally going to the now paid off debt. After you have paid off the this debt you will then move on to the third smallest debt that you have.

In using the debt snowball plan the idea is to continue with it until you have paid off all accounts that you owe money on, except for you house. The ideology behind the debt snowball plan is to gain steam and see real results by paying off the smaller debts first. This allows you to see real results and continue to stay motivated.

Below I have included an example of the debt snowball method

Ignoring interest rates, let's say that someone has the following debt and minimum payments:

Car Payment - $2500 balance - $250 minimum monthly payment

Card A - $250 balance - $25 minimum monthly payment

Loan - $5000 balance - $150 minimum monthly payment

Card B - $500 balance - $29 minimum monthly payment

Your minimum payments for all debt would be $454 per month. You would order your debts in the following order:

Card A - $250 balance - $25 minimum monthly payment

Card B - $500 balance - $29 minimum monthly payment

Loan - $5000 balance - $150 minimum monthly payment

Car Payment - $2500 balance - $250 minimum monthly payment

For this example we will assume that this person has $100 extra to put toward payments. This person would put that $100 toward Card A so that the payment for it would be $125 per month. The other 3 debts would then receive the minimum payments.

After Card A is paid off this person then would put the extra $100 toward Card B PLUS the $25 they were also putting toward Card A. The payment to Card B would now be $151. This allows you to pay off Card B very quickly.

Once Credit Card B is paid off, you would then send in the following to your car loan: $250 normal minimum + $25 that you normally sent in to Credit Card A + $29 that you normally sent in to Credit Card B + $100 extra. Your payment to Car Payment would now be $404.

In using the debt snowball method you simply follow the plan shown above until all of your debts are paid off.

The debt snowball plan is one of the best plans available for paying off the debts that you owe. It helps people to stay motivated through seeing real results and gaining momentum

Mark Loy is a self-made Personal Financial Advising expert who specializes in giving out free Personal Financial Advice over the internet. You can visit his Personal Finance Budgeting blog to learn more about the Debt Snowball Method.

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