Debt Snowball Method
Let's talk about how we create an attack plan. We've got the numbers, we have the information, we know exactly who we owe. So next step is, we have to figure out how we're going to get this debt dragon off our backs. What are we gonna do? Well first, I wanna talk about the debt snowball method. I like to refer to this as the, it makes my brain happy method. And the reason is, you're going to be focusing on paying off your smallest debt balance first and working your way up. Which means that you're more quickly going to get a little win up top and by doing that, it makes you happy, it keeps you motivated, you're gonna keep going. But the problem is, we're not paying any attention to interest rates here. So it's very likely that what's going to end up happening, is over the course of this debt repayment strategy, you're probably gonna end up paying a little bit more in interest than you would've if you'd used the other method we're gonna talk about in a minute, debt avalanche. Now to me,...
this is not that big of a deal because if this keeps you focused and on target and actually encourages you to pay off your debt, great. That's the goal, because if you're trying to just focus on the mathematical version and you're not motivated at all and you keep backsliding, well it doesn't matter if you'd be saving interest, you're gonna keep yourself in debt. So that's why this, very often, is a great way for people to get started. It gives you that little win up top and motivates you to keep going. Now let's actually overview exactly how this works. The first thing you're going to do, is write down all of your debts from the smallest balance to the largest balance. So I'm gonna work through, we're gonna say we have Leslie and Ben here, they have three credit cards and one student loan between the two of them. So when they write it out, you notice that the balances here are from smallest to largest. I put the APR, the interest rate, just because, but they're really not paying any attention to this. And then, they're also gonna write out the minimums due on every single thing. So that's the baseline that they have to pay in order to stay current on all of their debts. Now the next thing they're gonna do, harkens back to what we talked about yesterday in the budget segment. They're gonna do their cashflow, 'cause they have to know how much money that they have every single month to be putting towards their debt. Now as you saw here, they have to pay all of this, they have to pay their minimums due. And that comes out to $254 a month, but they realize after they run their budget, they're gonna scrimp a little bit, maybe they're figuring out how to earn more, but they know that they can put $330 a month in total towards their debts. So in step three, they're gonna take that extra $ they have and they're gonna tack it onto the minimum payment due on their smallest debt. And that's how it starts. So they're going to continue to pay the minimums on all of the debts and that's key for both debt snowball and debt avalanche. You always wanna be paying the minimums across the board and you don't wanna stop paying off one of your debts in order to throw all the money at something else, because if you do that, you're gonna go delinquent on your debts and then that's going to go to collections and destroy your credit score, going back to the credit score segment yesterday. So what we wanna be doing here, is making sure you're paying all of the minimums, but every extra dollar is going towards paying off this Orange Store credit card with that only $700 balance, their smallest balance. And what's gonna happen then, is they're gonna pay that off relatively quickly. And then they're gonna take some extra money that they were paying and they're gonna snowball it down to the next step. So we were at $101 here, we're gonna tack it onto the $36 minimum payment we were making on that Follow Bank credit card and now we're at $137 a month. You'll see here, I didn't have the balances going down. I didn't do the math on all that, so it would actually be going down in real-time as well. But you're going to now attack this one, you're gonna keep paying the minimums on your other two and as soon as that's paid off, you roll it down to the next, keep paying the minimum on your student loans, but now we're aggressively paying down the Town Bank credit card. And then finally, with one debt left, all $330 a month is going to go towards aggressively paying down that student loan. So the method here is you start small and you snowball up to something big. So you get those wins along the way, psychologically is encouraging you to keep going.