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Self Managed Debt Reduction: The Debt Snowball Effect
The first thing to do is accept that your debt is not going to disappear overnight. It probably took many years to mount up and it will certainly take months, perhaps years, to work it off. Forget about winning the lottery. If you want to get out of debt you have to develop patience and determination. You also have to stop using your credit cards.
Next, work out how much you have to spend. Look at ways to decrease your expenses and increase your income so that you have enough to live on, pay your essential bills and make the minimum monthly payments due on your debts. Cut out any repeat billings that are not strictly necessary, like gym memberships and magazine subscriptions.
Then start to save. Before you can operate the debt snowball you should have minimum savings of $500 for a single person or $1000 for a couple or family. This money is for emergencies - not food or rent, you have to cover those from your income, but for example to repair your car if you need a car for your work.
The reason you need this amount of savings is so that if an emergency occurs, you will not borrow or use the money that you need for your monthly payments.
Then you can start the debt snowball. Make a list of all of your debts, large and small. Include everything, even $5 that you borrowed from a friend that they never expected you to repay. Arrange the list in order of how much you owe, lowest first (the total debt, not the monthly payment). You should finish up with a list that starts maybe with the $5 you owe your friend and ends with your mortgage or your biggest loan.
Now you will take all the spare money that you have each month - the money that you were putting toward your savings before - and start to pay off those debts, beginning with the smallest.
Some people will tell you to pay off the highest interest debts first and while this makes sense in theory, it does not work in practice because we are not motivated by saving a few pennies here and there. We are motivated by a sense of achievement, and we get that whenever we can cross one debt off our list.
Imagine how you will feel taking that $5 to your friend. Way, way better than if you put it toward one of the bigger debts. The effect of the debt snowball is to motivate you to keep paying off your debts by having you get that great feeling of achievement as often as possible in the beginning.
To maximize the feeling, give yourself a treat whenever you pay off a debt. Don't make it an expensive treat of course, but do something that you enjoy. If you are married or have a family, the treat should be for all of you. Make getting out of debt a whole family experience.
Once you experience the feeling of paying off the first few debts, you will never want to go back. That is why it is called a debt snowball effect- you start it off and then it goes on rolling under its own momentum. Use the debt snowball to get yourself the best kind of debt reduction and relief.
For a review of tools and other articles to help your debt relief and debt reduction strategies visit Debt Reduction.