I have listened to Dave Ramsey a lot of the years – in fact he is the one who taught me How to eliminate debt fast. I did this by applying a technique he called the “Snowball Effect” to get myself debt free. It works amazingly well! In my opinion it is the best way to get out of debt. Read the article and take action now! Once you become debt free, stay that way. Even without a boost in income it feels so good! I swear it’s the best feeling in the world!
Myth: I should pay off the debt with the highest interest rate first to to eliminate debt fast
Truth: You should pay off the smallest debt first to create the greatest momentum in your debt snowball.
Commonsense would make it seem like you would want to pay off the highest interest balance first. But just like I describe in my guide to get out of debt the snowball approach is much faster. While using the “avalanche” method might save you a little more money it will take you longer to eliminate the debt.
Here are two reasons why the snowball is the best way to eliminate debt as fast as possible.
- Gives you little victories which are super important to keep paying down the debt, when you see results, as in a loan fully repaid you will start to feel more and more energized!
- The snowball works magic by gaining momentum – the faster you can build it the faster it will wipe away your debt leash.
I’m going to let the master him self describe the snowball method to debt freedom. Make sure to visit the full article on his website DaveRamsey.com
Debt Snowball Plan
The principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, nothing gets accomplished because all your effort is diluted. First accumulate $1,000 cash as an emergency fund. Then begin intensely getting rid of all debt (except the house) using my debt snowball plan. List your debts in order with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan.
Redo this each time you pay off a debt, so you can see how close you are getting to freedom. Keep the old papers to wallpaper the bathroom in your new debt-free house. The New Payment is found by adding all the payments on the debts listed above that item to the payment you are working on, so you have compounding payments which will get you out of debt very quickly. Payments Remaining is the number of payments remaining when you get down the snowball to that item. Cumulative Payments is the total payments needed, including the snowball, to pay off that item. In other words, this is your running total for Payments Remaining.
You attack the smallest debt first, still maintaining minimum payments on everything else. Do what is necessary to focus your attention. Keep stepping up to the next larger bill. After the credit debt is taken care of, you are ready for the next Baby Step in your Total Money Makeover.
I have been broke. I know how scared I felt, and I know how fast I wanted to get out of debt. I know how you feel, and I have learned that what really works is unbelievably fierce, focused intensity.
Just like the order of operations in math there is a strict formula to make this work: Lowest Balance (Same balance+interest rate) wherein you pay the lowest balance first unless there is another loan of the same amount with a higher interest rate on it.
Take action now! You will be shocked at how fast this will kill your debt!