The Snowball Method

The most common method for paying debt is what I call the snowball method. It starts out slow, but builds momentum like a snowball rolling down a mountain. Here's how it works.

Step 1 - Limit spending and come up with a budget that will allow you to stop accumulating debt and begin paying some off.

Step 2 - Find a way to make some extra income to pay off some debt. Either start some side work, have a garage sale, pick up some extra hours from your day job, etc.

Step 3 - Begin paying as much extra as possible towards your debt with the highest interest rate. If the minimum payment goes down as you do this, do not lower your payments. Continue to put as much as possible towards that one debt.

Step 4 - Once that debt is paid off, take everything you were putting against it and apply it to your debt with the second highest rate.

Step 5 - Repeat step 4 until all your debt is paid off. Once you pay off the first debt, you will begin to see the snowball affect as you're able to apply more and more towards the next debt each month.

Step 3 is especially important in this method. You have to make more than your minimum payment, especially on high interest debt, or you will be treading water and in effect just making interest payments each month without ever lowing the principal debt amount.

[QUOTE=Jeremy;13]

Step 1 - Limit spending and come up with a budget that will allow you to stop accumulating debt and begin paying some off.
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Glad you began there.. Some people dont know where to start..

I love this! You could make an excellent debt tutorial out of that!

That's a very good plan. I believe the problem with most people is sticking to it though. People like to be comfortable, so oftentimes it comes in conflict with discipline.

People often have the 'let go' attitude that lends them in a worse position. They just dont give these problems enough attention until they go out of control. Sad.

[QUOTE=Jeremy;13]

Step 2 - Find a way to make some extra income to pay off some debt. Either start some side work, have a garage sale, pick up some extra hours from your day job, etc.

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I dont think this is possible for people working in corporate sector. many are just tired of their regular job and you think they will pick up some side work. atleast all those i have come across do not have the strength to do it, and that includes me :)

Sigs, why do you say it's not possible in the corporate sector? I think that would be easier in most cases. I'm a programmer myself and picked up some extra work. There's sites like rentacoder.com that have various 'office jobs' posted for people to bid on (they're not just programing despite the name). You could also always do something different for you side work. My 'lawn guy' is an accountant by trade.

That's really important to get that highest interest debt paid off first. That'll really start to save up some money for the other debts.

Jeremy, i was in the IT sector too, but then after doing my MBA i got promoted and i am not into coding now. its a much more hectic job now with more responsibilities, like a group leader or team leader. when i was a coder, i also took part time assignments from rentacoder.com or odesk.com , but now i dont have time for that. i go to office by 8 and come back by 9. wheres the time to do all that part time stuff?