The Snowball: Moving a mountain of debt

From the August 26 edition of Your Money Today on KWAV 97FM.

Consumer debt is a major problem for many families. A recent Harris poll commissioned by The National Foundation for Credit Counseling, found that almost 13 million people carry a month-to-month credit card balance of more than $10,000. A equal number report they have debts in collection, are seriously considering bankruptcy, or have already done so within the past three years. 

If you are deep in debt, you don't need me to tell you how troubling financial troubles can be. Sleepless nights, embarrassing calls from collections agencies, feelings of financial hopelessness and arguments with loved ones cause huge amounts of stress and even depression. Life doesn't have to be this way. With a little planning, self-discipline and vigilance, you can get out from under your consumer debt and get on with life.

The core of the matter

As troublesome as it is, consumer debt is really a symptom of a bigger problem -- a failure to settle on what you really want in life. After all, if you really knew what you wanted in life, and were really committed to achieving it, would you sacrifice it for the stress of consumer debt or the banality of the things that debt usually buys?

This is why the first step in getting out of debt is deciding what you really want and then committing yourself to your decisions. Don't get me wrong, you don't have to define your entire life. It may be enough for you to decide that you really want to escape financial bondage. If you can commit to this level of purpose, your commitment will give you the resolve to pay the price to get out of debt and stay out.

For more ideas on how to get started on this decision process, take a look at an article I published last May on finding prosperity through time-honored principles.

Your snowball

After your commitment is in place, you can get down to the nitty-gritty of paying down your debt. The strategy I present here is called the Snowball and it has been used successfully for many years by people from all walks of life. If you are wanting to get out of debt, I bet it can help you, too. 

The essence of the strategy is to pay off your highest interest debt first. After that debt is paid, you take all the money you were paying toward that debt and apply it to the debt with the next highest interest rate. Continue this process until you are debt-free. The strategy is call the Snowball because the amount of money you are paying against the balance of your loans builds over time. If you are disciplined about it, by the time you get to the end of process, that snowball turns into a virtual avalanche of money. The following steps will walk you through the process.

Step 1

Make a list of all your consumer debt including the amount you owe, the interest rate and your minimum monthly payment. List your debts side-by-side on a sheet of paper with the highest interest rate furthest to the left and the lowest furthest to the right. Total the minimum monthly payment.

Step 2

Go through your monthly spending and identify all the non-essential spending you can cut. The money you save from reducing your non-essential spending forms the core of your snowball.

Families who are stretched financially may feel like they don't have any non-essentials, but in my experience, everybody has something if they just look hard enough. For example, if you are spending $6 a day on a sandwich for lunch, consider packing your lunch. Between leftovers and homemade sandwiches you will probably eat better and spend closer to $2 per day. Over the course of a working year, that $4 per day in savings will add up to almost $1,000. For other thoughts on how to find ways to save, read article on Values-based Budgeting and Tips for Taming Silly Spending.

Step 3

Make your minimum monthly payments on all your outstanding debt plus an extra payment on the highest interest rate loan equal to the snowball you created in Step 2. As you pay down the loan with the highest interest rate the credit card company may reduce your minimum monthly payment on that loan. They can see the loan balance dropping and they don't like it. They want to keep you paying that high interest rate as long as possible so they are going to try to entice you to slow your payment down. Don't pay any attention to them. Keep paying the same dollar amount as before and your snowball will grow. Pretty soon that loan will be fully paid and you can celebrate the event with a special ceremony marking a significant milestone on your journey to financial freedom. Then close the account.

Step 4

Watch your snowball grow! Keep making your minimum monthly payments on all outstanding debt, but add to your snowball the total amount you were paying against the first loan. Maintain this discipline month-in and month-out and you will be amazed at how quickly your snowball grows. As you progress, celebrate your milestones. This is a very big deal and you should recognize it as such.

Other steps

In your quest to become free of debt, don't forget other important steps.

  1. Contact your credit card company to see if they will lower your rate. If your credit is good, there's a good chance they will be willing to talk. 

  2. Consolidate your high interest loans into a single lower interest account. Be careful with this to make sure you don't shoot yourself in the foot. Here are some things to look for:

  • Transfer fees: Some consolidation loans charge a hefty upfront origination or balance transfer fee. The net effect of that fee is to increase the effective interest rate you pay. In post circumstances, I find it better to not consolidate and use the money I save in fees to add to my snowball.

  • Interest rate: Remember, the interest rate on the consolidated loan needs to be well below the weighted average interest rate on the loans you consolidate.

  • Credit score: Opening a loan consolidation account could have a negative effect on your credit score (one of the things credit rating firms look at is how many accounts you apply for) so be careful how frequently you try this.


The burden of consumer debt can be overwhelming, but you can overcome it. A little planning, discipline and consistent effort will go a long way toward putting you on the path to financial freedom. As you develop a clear commitment to what you really want out of life you will gain the resolve to stay on the path. And the snowball strategy will help by giving you a proven formula for success.