Snow Ball Effect

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The best way to get out of debt is to snowball one debt into another. What that means is to pay off one debt completely and from then on put the entire payment you were paying on the first debt towards the second.  This is not as easy as It sounds. The natural tendency for most people is to think they can afford something else as soon as they pay off a debt and  take on a new debt.

Here is how snowballing works, lets say you have 3 debt payments a month. First a credit card with $1000 on it with a min payment of $30 a month at 25% interest. Second a 5 year auto loan of $10,000 with a payment of $200 a month at an interest rate off 8%. Third a 30 year mortgage for $100,000 at 6%, with a $600 monthly payment. Now lets take that credit card, if you make minimum payment you will never get it paid off, because you are just probably making a payment for the use of the money. The real killer is the mortgage, On a 30 year mortgage you will pay over 2 times the value you bought your house for. That means that on your $100k mortgage you will end up paying $215k at the end of your 30 years. Oh and by the way your going to pay an extra $2,700 on that car.    What could you do with that type of money?

Hopefully by now you realize how limiting debt can be. Now here is how to get out of debt, you first need to free up some money. We will call this freed up money the accelerator now we take that accelerator what ever it is $30, $50, $100 and apply all of it to the credit card with the highest astronomical interest rate. For example lets take $100, you will apply that to the credit card debt paying it off in just 9 months. Then you snow ball the $100 extra  +  the $30 minimum payment into the car loan. Now with $130 accelerator money going toward the auto loan you can have that paid off in about 2 3/4 years. Once again you snow ball using all of the now $330 accelerator money putting it  into the mortgage Paying it off in 13 year!!!! Saving you over $100k.   I’ve kept this simple and didn’t account for the time each loan progressed as the others were getting paid off, so in reality it’s even faster.

You can go to bankrate.com to see a single accelerator in action on a loan, just plug in numbers into the formulas they have set up.

http://www.bankrate.com/calculators/mortgages/loan-calculator.aspx   

This can get very complicated very quickly with multiple cards, loans rates and so forth, but if you just get going snowballing smaller debts payments into an accelerator you will do fine. The key to successful snowballing is to not increase your debt, by taking on more debt after you get one paid off.