Using the debt snowball method to get out of debt

If you're trying to get out of debt, you know what a struggle that can be, especially if you can only afford minimum payments. High interest rates make you feel like you're just spinning your tires and getting nowhere. To successfully pay off debt, constant motivation is needed. The debt snowball method of debt reduction may provide the quick wins you need to get your finances in order.

Though many financial experts recommend that you pay off your debts in order of highest interest rate to lowest, others disagree. In fact, in a study from the Journal of Marketing Research, the snowball method of debt reduction works better because it helps people feel more confident and motivated. Closing debt accounts, independent of the dollar amounts on those accounts, was the best predictor of successful debt elimination.

Paying off debts with the highest interest rates is the most logical choice. After all, it saves a lot of money in the end. It's not the most successful way to pay off debt, though. Personal finance expert Dave Ramsey promotes the snowball method because small victories lead to bigger gains down the road. Getting out of debt is both a psychological and financial struggle. Ramsey says that paying the smallest debts first helps consumers gain momentum in their debt snowball. You need quick wins to help stay motivated throughout the task of getting your finances in order. When you start seeing those results, you'll want to continue reducing your debt.

The debt snowball method works by focusing on one thing at a time. First, Ramsey recommends getting a $1,000 emergency fund in place before embarking on a debt reduction program. Once that is done, list all of your debts from smallest to biggest. Pay the minimum balance on all other debts except the smallest. For this one, throw as much money as you can at it each month until the debt is paid. Then you'll tackle the next smallest debt. In addition to paying the monthly minimum for that card, you'll also include the amount that you've been paying on the smallest card. Rinse and repeat until all your debts are paid off.

Photo courtesy of Kamyar Adl via Wikimedia Commons.