Keys to Success:

Decide on your plan of action. Sometimes just deciding to start can have an amazing effect.
Apply the plan with consistency. Pay down the debts faster when you stick with the plan.
Pay down your debts without accumulating more debt.  If you accumulate more debt, this amount must be added to the payment.

Note: Check with your Lender, CPA or Attorney for additional guidance or information on prepayments, tax ramifications, etc.

Debt Mastery Resources

You may choose to build a buffer – usually in the amount of at least one monthʼs total payments. So in using the debt example above, with a total monthly payment of $1,733.00, you might decide on a buffer of $2,000.00.

Buffer Strategy # 1 – Builds the Buffer First / Then Starts the Snowball
$795.00 x 10% = $79.50 (or $80.00).
$80.00 x 25 weeks (about 6 months) = $2,000.00 Buffer.

So in six months your buffer is attained. Now you can apply the $80.00 per week (or $320 per month) to debt # 1 snowball payment.

Using the previous chart example – the student loan is $25.00 a month. $320.00 + $25.00 = $345.00. That will certainly pay that $4,900.00 balance quicker! (Seeing possibilities?)

Buffer Strategy # 2 – Builds the Buffer Slower / Starts the Snowball Sooner
$795.00 x 10% = $79.50 or $80.00.
$80.00 x 25 weeks (about 6 months) = $2,000.00 Buffer. Split the buffer building with the snowball starting. $80.00 per week (or $320 per month)

Apply $40.00 per week to the buffer and $40.00 ($160 per month) to debt # 1 (in addition to its minimum payment).

Using the previous chart example – the student loan is $25.00 a month equates to: $160.00 + $25.00 = $185.00. The buffer is building at $40.00 per week as well. Once the buffer hits your $2,000 goal – apply the weekly amounts to your debt and accelerate the snowball.

$40.00 per week toward the debt# 1 now becomes $80.00 per week (or $320 per month)

Next: Become a Master Over Debt

You may want to open a special savings account at your bank or savings institution and sweeping 10% of your paycheck into that account each pay period.

For Example:
Your $795.00 paycheck is deposited to your bank.
Take $795.00 x 10% = $79.50 or $80.00.
$80.00 a week x 4 weeks = $320.00 a month.

If possible, ask your employer to sweep the 10% to your savings account during the payroll process. This way you wonʼt miss it from the net income,  and it will be less tempting to cheat the system and more consistent.

You’ll need to build the buffer

Sometimes referred to by other names, the Snowball Effect has been around for many years and it goes something like this:

1. Take stock of all your monthly debt payment (credit cards, car loans, mortgage, etc).Make a chart by hand – or even better a spreadsheet in a program like MS Excel or Google Documents.
2. List each of your cards and other debts, the monthly minimum due, the interest rate and the current balance.  I like to also add the monthly due date.

Now there are two schools of thought on the snowball payment:

1. Pay off the highest interest rate first.
   In the above example that would be Card #2.By paying off the highest interest rate first, overtime you can save money on the overall interest paid.
2. Pay off the lowest balance first.
   In the above example that would be the Student Loan.

Usually by paying lowest balance you will:

• Get the snowball moving faster
• Eliminates the balances quicker
• Be motivated to continue the process

Snowball Strategies

Let’s say you went with strategy to pay off the lowest balance first and that:

• A Student Loan has the lowest balance – $4900.00 – with a $25.00 payment.

You need to determine how much to add to that payment.

Let’s say you decide to add an extra $50 a month to that payment, making it $75.00 a month instead of $25.00 a month.

By applying the extra $50 a month, you decrease the balance faster.

• Once the Student Loan if paid off – you would then add the total amount you were paying on it ($75.00) to the next lowest balance, which in this example we’ll call Card # 1.

So if Card # 1 minimum due is $180.00, you would add the $75.00 from the paid off student loan.

Now Card #1’s payment is ($180 + 75) $255.00.

• Once Card # 1 is paid off you would add the $255 monthly payment to the next lowest balance, in this example Card # 2.
• You keep doing this until all debts are paid.

Important Things to Consider When Paying Off the Debts

1. If you continue to charge to the credit card during this process… you would have to pay off the total amount of new charges in addition to the scheduled payment in order to keep the snowball going.For example, if while paying off Card #1 ($255.00 a month) you charged for new clothes in the amount of $200.00; then your payment that month would be $255.00 + $200.00 = $455.00.
2. As time goes by, the next lowest balance may change.For example, by the time you pay off Credit Card #1, the auto loan balance may be lower than Credit Card # 2 balance.You would then have to re-evaluate your strategy.
3. Some loans may take longer to reduce because of the way they compound.Student loans have been shown to re-compound when applying additional principal.
4. If your interest rate changes you may need to re-evaluate the process.If you are paying off the loan with the highest interest rate first and another debt incurs a higher interest rate, you may need to re-set your sights for the snowball to the new higher interest rate debt target.
5. If you are paying off a loan be certain that you will not incur pre-payment or early payment fees.Check with your Lender, CPA or Attorney for assistance.

Funding the Snowball

1. You can apply a random amount(Say $50 or $100) as the extra payment to the first debt’s monthly payment.Whatever amount you choose, be certain it is attainable each month.For example, you may be a commissioned sales person and in the winter you earn less than in the summer.Take such conditions into consideration when designing your strategy.You may want to choose an amount that you can comfortable pay all 12 months, or you may choose a lower amount and add even more to the payment during your better earning months.
2. Another way to determine the initial extra payment is to take the first loan amount and double it. For example, if the minimum for the first loan payoff is $125.00, you could decide to start with $250.00  as the initial snowball payment.

But Where Do I Get the Money?

Okay so that all sounds good – but you may be asking “Where do I get the extra money for the payment?”

• You could get a part time job.
• You could tweak your budget.
• But there is a third way: Pay Yourself First