There’s more to using the debt snowball approach than simply looking up a snowball calculator on the web. But thankfully the method can be straightforward. Here’s the basic steps:
1. Write down all of your debts in the order of smallest outstanding balance to the largest.
2. Commit to fulfilling the minimum payment on each of the outstanding debts.
3. For the smallest outstanding balance, apply all of the remaining funds that you can muster to it beyond the minimum payment amount, repeating this process each month until the smallest balance is cleared.
4. Repeat the steps for the next smallest outstanding debt balance, and so on. A simple rule-of-thumb is to apply the original minimum payment amount for the first balance that you cleared to the next target balance for reduction.
5. Continue with this process each month until all of the debts are cleared.
A typical question about the snowball method is whether or not contributions towards investment accounts should be made while using this approach. In almost all cases, one should avoid making contributions to retirement accounts, college savings plans, or other investment accounts while paying off the debt. Once the debt is eliminated, contributions to investment and non-emergency savings accounts should resume. Although one should not make additional investment commitments while paying down debt, one should also avoid removing funds from investment accounts in which there is a penalty involved, such as certain types of IRAs depending on one’s age.
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
Tags: debt, debt elimination, Debt Paydown, debt reduction, debt snowball, snowball method
