Facebook
Phone: (760) 941-1763

Strategy Center

A Faster Way To Pay Off Debt, Using the Snowball Method

Snowball payoff method

So many of us have found ourselves in the dreaded pitfall of debt. It can be so easy to fall into if you haven’t managed your money properly and so hard to come out of. Most of us have spent time researching ways to pay off debt and fast. But throwing money at your debts in the hopes it will vanish is not always the best method. Especially, when your total debts are upwards of thousands of dollars or more.

For one, you can end up using too much of your money towards debts, bills and fun activities and you’ll end up going right back to that credit card to make ends meet. For two, you could do all the right things by paying more than the required minimum payment and you’re still just paying primarily interest charges. And it just seem like it’s ever enough.

The snowball method is a simple structured way of paying off debt from multiple lenders.

How do you get stated?

Write out your net income, all expenses, and the monthly payment amount and due dates for your debts.

List out expenses you don’t need to spend money on or anything you can cut back on. Video streaming services, music streaming apps, eating out more than twice a week etc.

  1. Actually cut back! We can all find at least one thing that we don’t need to spend money on every month. Maybe it’s a gym membership. You can find a gym with a cheaper package, some rates are as low and $10-$20 per month. (The savings on average could be a savings of $30 per month).

Misc expense list

How Do You Do It?

  1. Determine your debt with the lowest remaining. This is your starting point.
  2. Allocate at least $20-$50 additionally per month towards paying down the first debt. You could use the money you save cutting back on expenses.

In the below example credit card #1 has the lowest balance. We will use this balance to start the snowball payment. Once it is paid off the total amount paid to it will transfer to pay down the next debt.

income & debt list

Paying off The Lowest Balance

  1. Make your regular payment PLUS the additional amount towards this debt (totaling $70/month).
  2. Continue to pay on other debts as you normally would (credit card #2 and Car loan with regular monthly payments).
  3. Once credit card #1 is paid off. The next balance to be paid off will be credit card #2.
  4. Pay credit card #2 using the amount paid on credit card #1 PLUS the regular payment amount (totaling $170/month).

cc1 to cc2

Paying Off The Next & Final Balance

  1. Once credit card #2 is paid off use the total amount you had been paying towards your other debts to payoff your car loan (totaling $320/month). As you can see the amounts are growing larger. They begin forming a snowball as they roll over to the next debt, forming a larger payment towards each larger debt.

Copy of cc2 to car loan

It will take some motivation and will power on your part, but IT WILL BE WORTH IT in the long run. Then you can put money away for savings, vacations, investments and cash purchases. Imagine having an extra $320/month.

Key Reminders:

  1. If you’re currently living paycheck to paycheck, don’t pay using more cash than will allow you to get you to your next check – you’ll land back into debt.
  2. Practice putting $20 – $50 dollars aside each check or each month. Now that you know you can live without it, pretend it doesn’t exist to spend. Pay your debt.
  3. Cut back on expenses you don’t NEED! Pay your debt.
  4. Once your debt is paid and you have tested yourself to live without it, pay yourself and grow your money for what matters to you. The money you used to pay off your debt can now be used for that snow day, retirement investment or to finance a large purchase – in cash!

Written by Jeff Johnson

Jeff Johnson has been helping individual and small business clients with tax and financial planning for over 15 years. Starting with a degree in finance from the University of North Dakota, Jeff has continually increased his financial education. He currently holds the industry designations of Enrolled Agent (EA) and Certified Financial Planner (CFP®). In addition, he holds a life and health insurance license from the state of California. Jeff is a member of the California Society of Enrolled agents and the Financial Planning Association.

Leave a Reply