A common strategy to effectively get out of debt is one that Dave Ramsey, author of Financial Peace, calls the "debt snowball." Instead of being snowballed by debt, you can use the snowball effect--the way a snowball gets larger and larger as it rolls down a hill--to free yourself from debt more quickly. Here's how it works.
1. List all your debts with their dollar amounts and required monthly payments. Put them in order with the smallest debt first and the largest debt last--no matter what the interest rates or monthly payments are. For example:
- Debt A: Balance--$400; Monthly Payment--$60
- Debt B: Balance--$600; Monthly Payment--$50
- Debt C: Balance--$5,000; Monthly Payment--$250
- Debt D: Balance--$20,000; Monthly Payment--$400
On your sheet, Debt A might be a gasoline credit card. Debt D might be a student loan or a car loan. If you own a house and have a mortgage on it, the amount you still owe and its monthly payment would be on the list too. The important thing is to list everything.
Notice that in the example above, a total of $760 a month is required to keep current in paying down debt. Okay, ready? Here we go!
2. Plan to pay off the smallest debt first. This would be Debt A with its balance of $400. You must still pay the required monthly amounts for all the other debts. But any extra money that comes your way--from a garage sale, a sale on eBay, anything!--gets applied toward this smallest debt.
3. Get the ball rolling. When Debt A is paid off, the $60 earmarked for it does not go back into the general budget. It joins the $50 intended for Debt B. Now, instead of paying just $50 a month on Debt B, you are paying $110 on it. Notice how quickly Debt B will disappear at this rate.
4. With Debts A and B paid off, combine their former payments of $110 with the $250 required each month for Debt C and pay the new amount of $360 a month to retire Debt C.
5. The snowball keeps rolling. When Debt C is eliminated, you now throw the weight of all $760 a month against whatever remains of the original $20,000 of Debt D.
When a married couple works together like this--focused on a goal important to their lives and future--they will see success come. Their teamwork will strengthen their marriage, and they will share in the wonderful freedom that comes from being debt-free.
For information on keeping out of debt, see Keeping Away from Debt's Door. Also, Romance and Fun on a Tight Budget and Money and Marriage.
