This article originally appeared on Christian Personal Finance. Used with permission.

Debt Snowball: The Preferred Method for getting out of debt

Creating a debt snowball is my preferred method of getting out of debt. The strength of using this method is that it focuses on the behavioral side of personal finance rather than the mathematical. Since we are not robots that always do exactly what we know we should, I recommend this method for most people.

These are the simple steps to snowball your debt:

  • Create a list of all of your debts: credit cards, car loans, student loans, mortgages, etc.
  • Next to each one write down the total balance owed.
  • Re-order these from smallest to largest debts (use Excel or Google Docs to make this simpler.)
  • Pay the minimum payment on all of the debts – except the smallest one.
  • Put every extra dollar you can find towards paying off that smallest debt.
  • Celebrate like crazy when you get that first debt paid off.
  • Take the amount you were paying towards the first debt and put towards the next smallest debt. Do this until this one is paid off.
  • Celebrate again!
  • Continue this process until each one is paid off.

What you will find is that each time you pay off a debt, the “snowball” gets larger. Since you are taking the amount you used to pay off the first debt and putting it all + the minimum payment that you were already paying to the second together, you are making more of an impact towards that debt. Each time you pay off a debt, the snowball gets larger and more powerful – which is great, because it just increases the speed that each debt gets paid off.

The Numbers Don’t Lie

If you are like most logical people out there (like me) you are probably saying, “you could save more money by paying the highest interest rate cards off first.” You are right – calculators do not lie and they will give you the correct logical answer. Paying your credits cards off starting with the highest interest rate to the lowest is “mathematically” the best idea. But, let’s look it at from another angle:

If we DID what we knew we SHOULD do 100% of the time, using the mathematical approach would be best. But, we are emotional beings and even the most disciplined among us still have emotions and are affected by them.

Computers use logic 100% of the time. Humans do not. We were not created to. We make decisions based on our emotions. We get let down, we get encouraged, we feel motivated, we get scared, we feel hopeful, we feel like quitting. These are all emotional states that each one of us could feel on any given day!!

Knowing that we are emotional beings, the key is to use our emotions to our advantage. Just like jogging with the wind at your back, it is a nice little boost to use our emotions to give us a little edge. So, rather than tackling the debt like a math problem, we can tackle it in a way that will give us emotional boosts! After all, isn’t it better to get out of debt and spend an extra $100 in interest than to give up half way to our goal because we were discouraged?

Status Bars and Debt

Ever wonder why there are status bars showing you the progress of the item you are loading on your computer? It is to keep us from going crazy while waiting 10 minutes for the computer to do what we told it!! Even though that little bar moves slowly sometimes, it is encouraging because we know how much longer we have to endure the torture of waiting.