Career & Money Lifestyle

Fastest Way to Pay Off Debt

“You must gain control over your money or the lack of it will forever control you.” – Dave Ramsey, Financial Expert

If you are in debt…you are not alone. According to a research study, the majority of Americans are in debt. Specifically, 80.9% of baby boomers, 79.9% of Generation Xers, and 81.5% of millennials currently are in financial bondage. The journey for financial freedom is hard. It requires a lot of sacrifices, but the more you sacrifice now, the quicker you will become debt-free.

The debt snowball is a highly effective method for getting out of debt fast. The method consists of throwing as much money as possible at your smallest debts first. This quickly reduces the total amount of debt and the number of creditors that you owe. Follow these steps to pay off your debt faster than you can say ‘credit score.’

Step 1: Organize Your Debts by Amount

List your debts from smallest to largest on a spreadsheet (excluding mortgage). List the name of debt, the amount of debt, minimum monthly payment, and the interest rate for the debt.

Example: Bob’s Debt
DebtMinimumAmountInterest Rate
Credit Card$200$7,435.6419.99%
Auto Loan$235$9,267.0212.4%
Student Loan$530$80,415.735%
TOTAL$965$97,118.39

Step 2: Make Minimum Debt Payments & Large Payment on Smallest Debt

Make minimum payments on all of your debts except for the smallest debt. On the smallest debt, pay as much as possible. The idea behind this is that if you do the minimum on all of your debts and “throw” all of the money that you have leftover at the smallest one, then the debt will go away quicker…hence the term ‘debt snowball.’

Example: Bob’s Debt

Since Bob’s smallest debt is his credit card, then he will focus on paying that debt off first with the debt snowball method. Bob has $500 extra each month he can pay on his credit card, so he will apply that $500 towards the minimum payment for his credit card.

DebtSnowball PaymentsMinimumAmountInterest Rate
Credit Card2̶0̶0̶ $700$200$7,435.6419.99%
Auto Loan$235$235$9,267.0212.4%
Student Loan$530$530$80,415.735%
TOTAL$1,465$965$97,118.39

Step 3: Roll Over Payment Once Smallest is Paid Off

Once the smallest debt is paid off, roll over that monthly amount to the next smallest amount of debt. In addition to that, throw as much extra money as possible to this debt to reduce it quicker. Tip: Get a second income or sell your things to increase the amount of money you can pay towards it.

Example: Bob’s Debt

Once Bob has finished paying off his credit card, he will roll over the amount of his credit card payment of $700 to the minimum payment for his next smallest debt, which is his auto loan.

DebtSnowball PaymentsMinimumAmountInterest Rate
Credit Card$̶7̶0̶0̶$̶2̶0̶0̶$̶7̶,̶4̶3̶5̶.̶6̶4̶1̶9̶.̶9̶9̶%̶
Auto Loan$235 +700 = $935$235$9,267.0212.4%
Student Loan$530$530$80,415.735%
TOTAL$1,465$965$89.682.75

Step 4: Repeat Step 3 & Roll Over Payment Once Smallest is Paid Off

Repeat the same process of Step 3 and roll over that monthly amount of debt and throw as much extra money as possible to this debt until it is gone.

Example: Bob’s Debt

Once Bob has finished paying off his auto loan, he will roll over the amount of his auto loan payment of $935 to the minimum payment for his next smallest debt, which is his student loan.

DebtSnowball PaymentsMinimumAmountInterest Rate
Credit Card$̶7̶0̶0̶$̶2̶0̶0̶$̶7̶,̶4̶3̶5̶.̶6̶4̶1̶9̶.̶9̶9̶%̶
Auto Loan$̶9̶3̶5̶$̶2̶3̶5̶$̶9̶,̶2̶6̶7̶.̶0̶2̶1̶2̶.̶4̶%̶
Student Loan$530 + $935 = $1,465$530$80,415.735%
TOTAL$1,465$965$80,415.73

 

 

 

Source: The Average Debt Profile by Generation; DaveRamsey.com.

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