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Step 3: Get Out of Debt

Debt Snowball

I like Dave Ramsey's advice on how to get out of debt. He calls it a "Debt Snowball."

The Debt Snowball

To start the debt snowball, list out the following for all of your debts:

  • Name of Account
  • Remaining Balance
  • Interest Rate
  • Minimum Payment

Sort your debts in order from lowest remaining balance to highest. Take all of the extra money you have at the end of the month and throw it at the first debt. Dave recommends paying off debts in this order because of the psychological boost you get by paying something off. As you start paying things off and wiping creditors off your list, you build momentum and it becomes exciting to see your debt accounts disappear.

There are opponents to this approach. Mathematically, you'll save more money by paying off the debt with the highest interest rate first. But, let's say you have a $100,000 mortgage with a 7% interest rate and a $1,000 credit card debt with a 6% interest rate. It's going to feel like an eternity before you feel any difference in your total debt balance if you start paying off the mortgage first. But, if you tackle the credit card first, you'll most likely see it disappear in a matter of months - and you'll get excited!

There's a great debt snowball calculator you can use for free, here.

Over-Simplified Debt Snowball Example

Beginning Balances

Account Remaining Balance Interest Rate Minimum Payment
Credit Card $3,000 24.99% $150
Car $15,000 2.99% $350
House $100,000 4.5% $800

1st Month

Expendable Income: $1,000

Account Minimum Payment Starting Balance Payment Made Remaining Balance
Credit Card $150 $3,000 $1,000 + $150 $1,850
Car $350 $15,000 $350 $14,650
House $800 $100,000 $800 $99,200

2nd Month

Expendable Income: $1,000

Account Starting Balance Payment Made Remaining Balance
Credit Card $1,850 $1,000 + $150 $700
Car $14,650 $350 $14,300
House $99,200 $800 $98,400

3rd Month

Expendable Income: $1,000

Account Starting Balance Payment Made Remaining Balance
Credit Card $700 $550 + $150 $0
Car $14,300 $450 + $350 $13,500
House $98,400 $800 $97,600

4th Month

Expendable Income: $1,150

Account Starting Balance Payment Made Remaining Balance
Car $13,500 $1,150 + $350 $12,000
House $97,600 $800 $96,800

5th Month

Expendable Income: $1,150

Account Starting Balance Payment Made Remaining Balance
Car $12,00 $1,150 + $350 $10,500
House $96,800 $800 $96,000

6th Month

Expendable Income: $1,150

Account Starting Balance Payment Made Remaining Balance
Car $10,500 $1,150 + $350 $9,000
House $96,00 $800 $95,200
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