It took some time to get into DEBT and it will take time to get out of DEBT. There is a very simple way to do it. This method has several advantage and works very well with a budget or Cash flow Plan (CFP). The beauty of this system is that it will not increase your monthly BAD DEBT expense!! The system uses what you already pay, in a more effective manner. I know that this system works because I have used it myself, and it has worked for everyone that I have known who actually uses it, and sticks to it! The only drawback to this method is that at the beginning, it doesn’t seem to have that much of an impact. It isn’t until the first debt is paid off that the impact is very noticeable.

The real magic of this system is that when your BAD DEBTS are paid off you will be able to convert your BAD DEBT payments to Savings Payments WITHOUT CHANGING YOUR LIFESTYLE. It is called the DEBT SNOWBALL.

We will use Ted and Mary’s CFP as an example. They currently spend OVER $1625.00 each month to service their BAD DEBT. They have 2 car payments, 2 lines of credit, 2 credit cards and a Student Loan. By following their CFP Ted and Mary are able to cover their expenses without using the Credit cards. (They are frozen into the wall of the fridge.) If you lack the self discipline to stop using credit cards, CUT THEM UP!!!!

We need to look at the type of DEBT first. The Credit Cards have that highest rate of interest and that interest is charged daily so the Credit Cards are the first target.

From the chart you can see that Ted and Mary are paying a little extra on the Lines of Credit and the Credit Cards. This is good, but with balances that high it takes a long time to make a difference. Here is how the DEBT SNOWBALL works. Pick one DEBT to knock off first. In this case, the highest balanced Credit Card. From the chart you can see that they are making extra payments totalling $341.00 per month, on everything but the car loans. We are going to pay ONLY THE MONTHLY MINIMUMS on each DEBT, EXCEPT for the target DEBT (the high balance credit card).

What is adds up to is $241.00 (the total amount paid over the required minimum payment on all the other DEBTS minus the extra $100 we were already paying on that card) to apply to our target. The payment on our target is now $616.00 ($375 original payment plus the $241 from the other accounts) a month.

Putting all of this amount on the one account will pay it off in roughly 19 months**. Yes that is a long time. This system is easy and doesn’t ask you to spend more on servicing your DEBT than you already spend, BUT IT IS NOT A QUICK FIX!!! It is at this point (when the first big DEBT is paid off) that the snowball picks up speed. After 19 months all of your other DEBTs will be lower. Your minimum monthly payment also (in most cases) includes some principle repayment.

Our next target is the second credit card. The balance after 19 months should be close to only $5800.00 now. You have been paying the minimum payment each month of $256.00. You will now add to that minimum the $616.00 that you were paying on first card. That totals $872.00 per month. Notice that the total amount you spend on servicing your DEBT has not changed. (Based on no increase in DEBTS) Paying that much each month will pay off the second credit card in roughly only 8 months. Note how fast that is paid off. So after 27 months you have paid off $18,000.00 of DEBT. Pretty impressive.

Now you pick the next target. Suppose it is the 1st Car payment. After 27 months there is roughly $6,500 left. We will now increase the payment to $1128.36 per month. (The $872 we were paying the last target, plus the $256.36 we are already paying. That DEBT is gone in roughly 7 months. Repeating the snowball on the last car payment would get it paid off in another 5 months. The remaining DEBTS would be paid off in about another 6 months. So after roughly 45 months you would have paid off $58,000.00 in BAD DEBT.
Ted and Mary did this without having to change their monthly payment for DEBT in the whole 45 months. Any increase in income was available for other things. If they had of taken a portion of the added income and applied some of it to Debt Reduction, they would have been BAD DEBT free sooner.

But now comes the real magic of this method. Since Ted and Mary have spent the last 45 months paying out $1626.00 a month on Debt, they have that amount built into the CFP. Now that the BAD DEBTS are gone, They can place that same amount into SAVINGS. If they saved the $1626.00 a month, at the end of 12 months they would have have $19,512.00 in Savings. Enough for a down payment on a house of their own.

FOLLOW THIS LINK TO A DEBT SNOWBALL CALCULATOR. It works very well and is great for estimating how long it will be before you are Debt Free.

**NOTE The numbers and times used are for illustration purposes only. They are approximate. Credit card interest is charged daily, so calculating exact repayments is difficult. These calculations are all based on NOT INCREASING YOUR BAD DEBT!!!!