Sometimes the sound of the mail carrier dropping mail through the slot is scary and nerve wracking. Just how many bills are in that pile of mail? Lucky for you there is a great strategy for taking care of those bills and getting out of debt. Its called the Snowball Effect.
1. First you need to collect all your bills and set them out so you can see them clearly (an otherwise empty dining room table works nicely). Now sort those bills into two piles. One is the must-pay pile (think utilities and mortgage). The second pile should be comprised of what is called consumer debt (car loans, student loans, and those dreaded credit cards).
2. You can’t really pay off the utility company and your mortgage is probably going to take a while, so set those aside. They should always be paid first because if something really bad happens, you still need a roof over your head and heat this winter.
3. Now look at the bills that are left. Many people have several different credit cards with varying balances. The first thing you need to do is NOT go to a debt consolidation. It rarely helps and all they will do is charge you a fee for basically following these instructions for you. Find the bill that has the lowest balance. That bill is the beginning of your snowball.
4. At this point the best way to knock out debt is to hit it with the biggest snowball you can make. You do this by taking any extra money you have each month and adding it to that smallest bill. For example, if you have four bills (student loan of $5000, Visa card $1200, Mastercard $3400, and a car loan $7200), the smallest bill is the Visa card. It doesn’t matter which bill has the highest interest rate. Do not put any extra money toward any of the other bills until you have paid off the Visa card (then cut it up so you don’t end up in the same spot next year).
5. After the Visa card is paid off take all the money you were paying on it each month and apply it to the next smallest bill, in this case the Mastercard. By continuing this process your “snowball” of money continues to grow and knock out each bill in turn.