If debt reduction seems like a pipe dream, you may need to adjust your approach. With the right choice on how to attack your debt, you may find that you can do more than reduce your debt. Becoming debt free could be a reality. One method that has been employed successfully by many people and debt management services is the debt snowball.
A debt snowball reduces debt with a system that is easy to employ and understand.
The idea behind the debt snowball is that you start small. As a small snowball rolls down a hill, it picks up more and more snow and rolls faster and faster. With a debt snowball, you begin to roll your debt downward. As each debt is paid off, you have more available funds to pay off more debt until you are debt free.
Start by collecting all of your bills for debts in one place.
You need to know how much you owe before you can think about getting rid of debt. It is important that you be able to see your progress as the debt is reduced. Without this incentive, it can be easy to lose interest and motivation to keep going. Arrange your debts from smallest to largest. You can wait until later to include your mortgage since you will want to target it as a separate issue after you have retired your unsecured debt and other debts like car loans.
Add up all of the payments to arrive at a monthly total.
Knowing how much you owe is necessary, but knowing how much it costs you to service this debt is too. Many people just write check after check without ever realizing how much they spend per month servicing outstanding debts. Put on your thick skin and do some relaxation exercises before you add this number up. You may be shocked with how much you spend just to pay your debts before you ever start doing anything else.
Pay all debts the minimum amount but one.
Once you have your monthly payment total, you need to treat this as one big bill. Add up all of your income and all of your expenses for a month to see how much if any extra money you have to use for debt retirement. Apply this extra amount to your smallest debt in addition to the minimum payment. Pay all other debts with the minimum possible to keep your credit standing in good condition.
Once the first debt is retired, add its payment onto the next smallest one.
You should start to see immediate progress in reducing the size of your smallest debt. Find other ways to get some dollars to augment this payment. As soon as this debt is gone, take all of the money you have been paying on it and add it to the minimum of the next smallest debt. For example, if you were paying the first bill $100 per month and the minimum on the second bill is $45 per month, the second bill will now be paid $145 per month. Continue this pattern until all of your bills are gone.
The debt snowball works because you never change the original amount you are paying.
By the end of the process, the final bill will be receiving the entire amount that you were paying for all of your debt service at the beginning. If the total of your payments was $900, you will pay off the last debt at $900 per month. You can increase the amount you are paying if you get additional income. The great thing about this process is that your smallest bill may be the slowest one to pay off. As the debt snowball picks up the pace, you individual debts will wrap up faster and faster.