The Debt Snowball. What is that? Basically, when you want to pay off your debt, it is the best way to go about it. When B and I were trying to pay off our student loans, we did it by using the debt snowball. It was the best and most motivational way to pay off our $166,000 student loan debt! Trust me, this works!
What is the Debt Snowball?
The debt snowball is a term used by Dave Ramsey of Financial Peace University. You can see his book here.
It basically means taking your debts and treating them like a snowball. You continue to roll more and more money into the payment so it gains speed and you gain momentum in paying it off as quickly as possible.
How Does It Work?
First, the debt snowball works by taking all of your loan or debt payments and listing them out. List them from smallest to largest minimum payment amounts. Include all debt besides your house. This means including credit card debt, car debt, loans, etc. Once you find the smallest loan with the smallest minimum payment, you take as much money as you can you pay it off. Sometimes it will be a $200 credit card payment. Sometimes, like with us, it will be a $2,000 student loan payment. It doesn’t matter what it is, you just need to pay it off. Once the smallest debt is paid in full, you take that minimum payment from the smallest debt and apply it to the next smallest.
While you pay off the smallest debt, you are still making minimum payments on all of your other debts. This is key! Do not stop making minimum payments. If you stop paying the minimum, it will not help you pay off all your debt.
Continue to do this for all debts. Pay off the smallest, then apply the minimum from that payment to the next smallest. Then do that for the next smallest loan and the next. Eventually, you will be paying a ton of money on your biggest loan, and it will disappear quickly.
See It In Action
First, list out all your debts from smallest to largest.
Example: $50/month credit card, $150/month student loan, $350/month car payment, $400/month student loan, etc.
Next, pay off the smallest debt. Say your $50/month credit card payment = $200 worth of credit card debt. Pay as much extra as you can on top of the $50 to pay off that $200. Maybe you can pay it off right now. Or maybe it takes 2-3 months. However long it takes, pay it off as quickly as possible.
Once that is paid off, use that $50 minimum monthly payment and add it to your $150/month student loan. Do not take the extra money from your monthly payments and start using it for groceries or splurge money. Grocery money should already be set aside in your budget. For a free budget template click here! Trust me, it’s difficult. It takes a lot of discipline. But it is so worth it!
Now, instead of paying $150 a month, you will pay $200 a month towards your student loan. That might take you a while to pay off. But as soon as you pay it off, add that $200/month now to your $350/month car payment. Now your car payment is $550 a month! If you continue to do that, you will pay off your debts quickly. It’s exactly like a snowball. Push it down a hill and it will continue to pick up snow, get bigger and gain speed!
This is exactly how B and I paid off our $166,000 student loan debt. We started with the smallest and continued to add and add until we have now been putting 60% of our income towards 1 more loan! You guys! These were 10 year student loans! Because we did not pay all of the interest while we were in school, we had over $20,000 in interest that we already accrued in the 4 years of school. Imagine how much extra money we would have paid if we just paid minimum payments for 10 years. I can tell you it would be too much!
I could probably buy a really nice car with all that interest money we saved! Instead of taking 10 years to pay off our student loans, we did it in four! Four long years of sacrifice and discipline, but it was worth it! It’s hard to explain the freedom I now feel knowing that our loans will never own us again. We will never be in debt again!
This is the reason I started a blog in the first place. I started it to convince people to pay off their student loans and get out of debt! I know there are more people out there with a story similar to B and I. But the only stories I hear are of 20-40 year-olds still paying their student loans with no plan to pay them off early. Let me tell you that there is a dang good reason to pay them off early! FREEDOM! Doing whatever you want with the money you make. B and I can do soooo much now with that extra 60% of our income. Obviously, we will be smart about it because of the lessons we have already learned. But we can do so much you guys! Trust me. It’s worth it!
You can read my rant about why everyone should live debt free here.
It Works! I Promise!
I’m serious. The debt snowball works. If you have ever wanted to be free from debt, put this into practice. Let me know how it goes!
Has anyone done the debt snowball? How long did it take you to become debt-free?!