Debt Free Living - The Debt Snowball Method

The snowball method is ridiculously easy to understand. It consists of the following simple steps:

1. Find some way to free up a bit of extra cash each month. Either get more money coming in (hard to do) or else cut down on your expenses (do without your daily latte if you have to!). Note: Debt consolidation is one way to reduce the expenses, but it's not ideal and you should look hard at your budget before going that route. See below for some ideas.
   
   
2. List your debts from smallest balance to largest. For debts of comparable size, the ones with the highest interest rates come first. Pay the minimum required payment for each debt on your list. Don't skip any payments, you want to keep your credit report clean.
   
   
3. Add the extra money you've freed up to the monthly payment for the #1 debt on your list, the one with the smallest balance. You're accelerating your repayment of that particular debt. The extra money typically goes right against the debt principal; a small amount each month can make a big difference to the amount owing over the span of several months.
   
   
4. Continue paying extra on that one debt until the debt is repaid in full. This will likely take several months, perhaps even two or three years. Note: It's important to not incur any further debt during this process, otherwise it won't work. Stop buying things on credit.
   
   
5. When the debt is repaid that frees up even more money on a monthly basis. Cross the debt off the list. Add the debt payment amount to the extra cash you've already freed up. This new, larger amount is now available to pay down another debt.
   
   
6. Repeat the process with the next debt on the list. Continue paying down debt until all your debt is gone. (Except perhaps for your mortgage although paying it down should also be one of your goals.)
   
   
7. If you follow through with the plan and it will likely take years to complete you'll find that your total indebtedness starts to decrease at an accelerated pace. As one debt is paid, the money you put towards that debt is immediately put to use paying off a different debt, and so on, and so on. It's called a "debt snowball" because it's like starting an avalanche (of debt repayment!) by letting a single, small snowball roll down a mountainside.
   

Finding Extra Money

Getting started is the hardest part of the debt snowball method, because to start an accelerated debt payment plan you need to find extra cash on a consistent, monthly basis. If you're already strapped for cash (because of your burden of debt) this will seem very hard. You have two basic choices:

Make extra money. A part-time or second job is possible here. Or maybe you can make money online. It's going to take time and effort on your part.

Cut your expenses. This is usually the best option. Instead of adding the stress of more work to your life, look for ways to cut your expenses. Yes, consolidating your debts is one option, but you should look at the other options instead. Cut out the movie dates, for example, and watch movies at home. Cut out desserts and those fancy coffee drinks. (You'll reap some health benefits, too.) Don't spend money frivolously. Budget your spending, and stick to your budget.

-- From nodebtisgood.com