If youâre like most Americans, you probably carry some significant debt. In February, the average American was over $78,000 in debt, including credit cards, car loans, and home mortgages. And the average American with credit card debt had an outstanding balance of almost $16,000. In fact, the debt can be some much that some people have to turn to professional debt management firms for help. But there is a way to give yourself some personal debt relief, whether you get professional help or not.
The so-called âdebt snowball plan,â coined by Dave Ramsey, uses psychology to help folks get out of debt. Normally, financial experts recommend paying off high-interest debts first because youâll typically owe less over the long term. However, the debt snowball plan recommends that you pay off low-balance debts first so that you build up the confidence youâll need to maintain long-term momentum on your way to debt freedom. Hereâs how it works:
- Organize all of your debts and arrange them from lowest balance to highest balance
- Make all your minimum monthly payments on all of your debts, but pay as much extra as you can on the debt at the top of your list so you can pay it off faster
- Once the lowest-balance debt at the top of your list is paid in full, transition that payment as an additional monthly payment on the second debt on your list â in other words, donât decrease your total monthly debt payment; use the extra money you no longer need to pay on your first debt to help pay down your second debt faster
- Once your second debt is paid in full, transition its monthly payment (which will be the amount you had been paying on your first and second debts combined) as an extra monthly payment on your third debt
- Repeat these steps as necessary; by the time you reach your final, largest-balance debt, youâll be paying significantly more than the minimum amount each month (in fact, the total of all your other debt payments combined, plus the minimum monthly payment of your final debt)
Paying off your lowest-balance debt quickly and then transitioning that monthly payment to your second debt, and then the monthly payment from your first and second debt to your third debt, and so on, will help keep you motivated to get debt free as soon as possible.
Have you tried the debt snowball plan? Let us know how it worked for you. We did it, and it worked great for us.
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