Making a Snowball

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If you have had the privilege of taking our nine-week Bible Study (Navigating Your Finances God’s Way) or attending our “It’s not about the Money” financial seminar, you may have heard of “The Debt Snowball”. During our nine-week sessions, we review this concept to make sure the participants are familiar with it, and it occurred to me that it might be useful to review it here as well.

When working toward eliminating consumer debt, there can be some confusion regarding which debts to tackle first. Is it better to pay off higher interest debt first, the lower balance, or the one that is just driving you crazy, like the student loan that is ten years outstanding?

We teach our participants to write out all their debts including outstanding balance, minimum payment, interest rate and scheduled payoff date. The debts should be arranged in order from lowest balance to highest, regardless of interest rate.

As you develop your budget, any ‘extra’ money should be added to the minimum payment of the first (smallest balance) debt in order to pay it off quickly. The goal is to have a victory under your belt by paying off some debt as fast as possible. Once that first debt is paid off, celebrate!!! Of course, if you have two balances that are about equal, it would make sense to pay off the higher interest debt first, but this is the only time we would prioritize by interest rate.

After that first debt is paid off, apply what you were paying on the first debt to the minimum payment on the second debt. For example, if the payment on the first debt was $69 and the minimum payment on the second debt is $59 the new payment amount for the second debt will be $128. Continue to pay the minimums on all other debts on the list until the second debt is paid. The $128 will then be applied to the minimum payment on the third debt while continuing to pay the minimum on the others until the third debt is paid. Continue using this system until all the debts are paid off.

There are two reasons for the logic behind this concept. The first is to experience the reward of paying off a debt, no matter how small. When the black cloud of debt is taken away, there is a weight that is lifted and you regain confidence in being able to tackle more. Once you have a small victory it builds enthusiasm for paying off more debts.

The second reason is that, by keeping the monthly payment amounts the same, you will be able to knock each successive debt out faster. If you have been paying $348 each month toward credit card debt, that money has already been set aside for debt repayment. This also means however, that the funds from the paid debt should not be reallocated to entertainment or some other area of the budget until all the debts are paid in full.

There is one caveat to this system, of course. If the debts are credit cards, the cards must not be used during the pay-off period…period! We have several suggestions to remove the temptation of using the credit cards. For example, one of my favorites is known as “Plastic Surgery”. As the name implies, it simply requires taking a pair of scissors and cutting up the cards. Another one I like is “Sub-Zero Credit”. Simply fill a container with water, add the cards and freeze solid. With the amount of effort it would take to get the cards out of the block of ice, you might lose that sense of urgency and think twice about digging them out again.

I hope this review of the Debt Snowball has been helpful. If you have any questions or suggestions regarding this method, please feel free to contact us at Compass

“Do not withhold repayment of your debts. Don’t say ‘some other time’, if you can pay now.” ~Proverbs 3:27 & 28

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