Snowball Debt Elimination

Posted On 27 April 2020

Last updated on April 10th, 2024

Debt elimination is something that most people would like to do, yet a lot of people have come to believe that they will simply be in debt for the rest of their life. I find this to be a sad state of affairs. The biggest problem with debt is the lack of financial education.

If used responsibly, debt is a wonderful tool. Think of it like a chainsaw – it can allow a person to clean up fallen trees (solve problems), get firewood to heat their home (self-sufficiency), or a lumberjack to earn a living (earn a profit). If used improperly, that same chainsaw can lead to frustration, loss, and pain.

Debt is a tool that allows us to do more and do it faster. It allows us to live in the house while we are paying for that same house. We can use debt to pay for an education or start a business. The problem arises when we use too much debt, or we finance things that we should not finance at all.

Stop Adding to Your Debt

The first, and most important, step in the debt elimination process is to stop adding to the current debt! I know that sounds overly simple. It is true. Maybe you need to cut back your spending. Maybe a you could go on a money fast. Make a change in spending in order to make a change in your life.

If you use a credit card for your regular spending, and you want to keep using the card, you can do that. Your card balance must decrease every month, or you must pay the card balance off every month.

Itemize Your Debt

Write down all the debts that you have. Feel free to exclude your mortgage. Most people have enough other debts – car loans, credit cards, store credit, student debt, medical bills, etc.

List all the debts you have. Start with the smallest debt with the highest monthly payment. Next would be the second smallest debt.

Keep Paying the Minimum +$1

It is important that you keep paying the minimum on all your debts. With this approach to debt elimination, you will only focus on one debt at a time.

If you are in Canada, it helps your credit score if you pay at least $1 more than the minimum due. A good credit score is something to build and maintain.

Find $100 (or More) per Month

You’ll need to find at least an extra $100 per month that you can use for your debt elimination program. Experts recommend spending 70% or less of your income every month. If you can use 10% of your monthly income toward debt elimination, this whole process will go faster. If you need some help finding extra money, you can check out my post Let Your Money Tell a Story.

The important thing is that you find some extra money every month. This is your own personal program. You can put as much as you want into it. Just remember, the more you pay every month, the faster you can eliminate your debt. Don’t use the money that you are putting into your Emergency Fund, though.

Focus on your smallest debt first. You want to pay that off as fast as possible. Then, you will have the minimum payment from that debt to use for your program.

Snowball Debt #1 and the $100 onto Debt #2

This is where the debt elimination program snowballs! When you pay off that first debt, move onto the second debt. Add the $100 and the minimum of the first debt to the minimum of the second debt. The extra money pays that debt off faster!

When you get to the third debt, add the $100 plus the minimum of the first two debts. I think you get the point. The trick is to get the momentum moving in paying off the debt.

Continue with the Other Debts

Continue applying this program to your debts until they are all paid off. It will take some time to get all your debts paid off. That’s ok. It generally takes a person (or a couple) time to accumulate debt. It is such a great feeling to be debt-free! Keep up the hard work and you can enjoy that feeling of not owing those debts anymore. Armed with the confidence acquired by using the Debt Snowball technique you can now turn your effort to your home mortgage.

For further reading on the snowball technique for debt elimination, check out Dave Ramseys’ post here.