Start the Debt Snowball Rolling

When a snowball rolls downhill, it gathers more snow. The larger it gets, the faster it rolls. The faster it rolls, the more snow it picks up. Reducing and eliminating debt works much the same way.

Here are some simple tips for getting yourself out of debt that I learned from financial guru Dave Ramsey, whose radio show, Financial Peace, is one of the most popular of its kind in the nation. Ramsey refers to the process we're discussing as "the debt snowball."

1) List all creditors on a sheet of paper. This list should include your home mortgage, any auto loans, bank loans, credit card debt, medical bills, student loans and any other money owed, whether the amount is large or small.

It's important to include every debt you have. If needed, go back through your checkbook to refresh the memory.

2) Next to each item, write the total balance remaining to be paid and also include the monthly payment. There is no need to write down the interest rate you're paying. More on that later.

3) Arrange the debts in order from the smallest remaining balance to the largest remaining balance. We're not talking about the monthly payment, just the remaining balance.

Let's take a look at an example. At this point, your list should look something like this:

Hospital: $100 remaining balance; monthly payment of $25.
Credit card: $300 remaining balance; monthly payment of $50.
Car: $1,500 remaining balance; monthly payment of $200.
Student loan: $2,500 remaining balance; monthly payment of $75.

4) After you've budgeted for keeping these bills current and once your list is arranged, the next step is to determine how much extra money you can budget that will be used only for paying off debt. Let's say, for our example, that amount is $300 per month.

5) Using that $300, start with the lowest remaining balance. In our case, it would be the hospital bill. You have set aside enough to pay off the hospital entirely, plus pay $200 of the $300 that's owed on the credit card. Next month, you're able to add in the $25 you were paying to the hospital, so you have $325 to work with. Our balance on the credit card is now (approximately) $100. We pay it off and use the other $225 on the balance of the car, reducing it to $1,275. In reality, the balance would be a tad lower since you've been making the minimum payment during the process. In the third month, you have $375 to use for reducing debt ($325 plus $50 that you were paying on the credit card). All of that - and any other money you can find - goes on paying off the car. This should take less than four months. At that point, you have $575 each month budgeted to reducing - and eliminating - debt. Using our example above, all debt would be eliminated within about nine months.

Debt can overwhelm a person who doesn't organize the debt and have a plan for eliminating it. Debt has a way of lingering.

But what about the interest rates? Mathematicians will scream that this isn't the smart way of doing things. One must analyze the interest rates and work out a formula that will put the money to its most efficient use each month. Ramsey's answer is that one has to be emotional in order to eliminate debt. The great thing about the debt snowball is that, by starting with the smallest balance regardless of interest rate, a person sees progress and is motivated to keep going.

Make a goal of becoming debt-free.