Before embarking on any debt reduction plan, be sure to save up $1000 as an emergency fund. Once this first step is behind you, it’s time to take a look at your debt repayment plan.
One of the most effective way of paying down debt is a method known as the debt snowball. It takes a lot of dedication and effort to stick with this, but it works every time if followed properly.
Personal finance is 80% behavior and 20% head knowledge, according to financial expert Dave Ramsey. The debt snowball is designed to modify your behavior with money. Some might argue that the math needs to add up before one comes up with an effective plan, but in reality it’s having the right motivation that is the most important factor for a plan to work.
The way the debt snowball method works is as follows: list all your debts, smallest to largest, and then pay the minimums on all the debts except the smallest. Allocate as much as you can to that smallest debt and keep paying it until that debt is paid off. Then take the money you have been paying on the smallest debt and apply it to the next smallest debt. Keep this up until you have only one debt left, and when that is paid off you will have completed the snowball.
During this process, you need to stay fanatical about your plan. Avoid putting any money into savings until all your debt is paid off, and focus all your emotions into finishing the snowball at all costs.
The key word here is emotions. Your emotions affect your behavior, and your behavior is what got you into debt. Those who tell you to pay off the highest interest rate first because it’s better math don’t realize that it wasn’t bad math that created your debt; it was bad behavior. So fix the behavior, and the debt will be eliminated.