How to reduce debt using the snowball debt reduction method

Snowball Debt

Rate: (6 Ratings)

Almost everyone has some type of debt that they would like to reduce and get rid of. The problem is that most people view their money emotionally instead of rationally, and find it hard to stick to a debt reduction plan. I like to use the classic snowball debt reduction to help me reduce my debt in a rational, goal oriented way. If you view your debt rationally and stick to the snowball debt reduction plan, you will reduce your debt. Here is how you do it.

Flag Article

Instructions

Difficulty: Moderate

Things You’ll Need:

have debt
be patient and stick to the plan

Step1

The first thing we want to do is identify the highest interest rate you are paying in your debts. So make a list of all your debts and order them from the highest interest rate to the lowest interest rate.

Step2

Now you want to look at all of your income and compare this to your debt. Do you have enough left over to set aside each month to go toward paying your debts? Be realistic about this amount and do not strap yourself each month for necessities like gas and food.

Step3

Specify what that amount of money will be to go toward paying your debts each month.

Step4

Once you have established the extra amount of money you have left over each month, make the minimum payment on all debts. Whatever money is still left over after you have made all of your minimum payments, put the extra toward the debt with the highest interest rate.

Step5

When you finish paying off the debt with the highest interest, reassess the extra money you have coming in each month and to pay down the debt with the next highest interest in the same manner.

Step6

OPTIONALLY: You can list your debts from the lowest to the highest balance, and apply your money toward paying off the debt with the lowest balance first and then moving up the list. This also works, but it only works really well if you have debts with an equal or near equal interest rate.

Step7

Now that you understand this technique - take a look at how to analyze your debt to income ratio here:

http://www.ehow.com/how_2311884_calculate-debt-income-ratio.html

Tips & Warnings

The key is to make the minimum payment on all debts, and to apply any extra money toward paying down the debt with the highest interest rate payment. The payments made toward the first debt that was paid off get “snowballed” into the next-highest-interest-rate debt.