Step 2: The Debt Snowball

Now that you have your $1,000 saved we are ready to pay off the debt. The process is simple, but requires a huge amount of effort. First, list all your debts in order of smallest balance to largest, except for the house. Paying off the house will be another step. Make sure you list every debt, even if there is no interest.

Why not list smallest interest to largest? The main reason for doing it from smallest balance to largest is that there will be some quick payoffs. Also the interest paid will not be significant once the debt snowball is rolling. This is more of a change in behavior rather than mathematics.

By getting a few small debts paid off quickly you will be more likely to stay on the plan. This should also get you excited since you will be paying off debt faster than you could imagine.

After you have your debts listed, pay the minimum on all debts except the smallest. Put as much money as possible into the smallest debt. Once the smallest is paid, the payment from that debt plus any extra money is added to the next smallest. Then when the second debt is paid off, the payment from debt one and debt two plus any extra money is added to debt three.

Every time you pay off a debt the next debt payment is increased. Just as a snowball increases in size as it rolls down the hill, your payment will increase on the next smallest debt until all debts are paid off. You will begin to start paying over $1,000 per month on debt. That should get you really excited.

Now if you want to get out of debt, this is the way to go. April and I are currently on this step and we have knocked off lots of small debts. I have even discussed my progress in previous posts. We currently have four creditors to go. We have two car payments and school loans. Since starting this plan we have knocked off about five debts.

After this step you should be debt free, except for the house.