We’ve talked numerous times in my blogs aimed at young adults about how crippling debt can be. In addition to being extremely stressful, debt can also keep you from having the flexibility to try new things and invest in multiple experiences so you can find out what truly brings you joy. Whether your debt is due to credit cards, student loans, car payments, or other situations, the effect is the same. Getting out of debt early in life is one of the absolute best things you can do for yourself and will put you years ahead of your peers in terms of financial stability. So now the question becomes, how do you do it?
The Debt Snowball Process
The method I encourage young adults use to get out of debt is called the ‘debt snowball’ and it’s pretty simple. To explain it, let’s assume that you have three debts: a credit card with a balance of $400, a car loan with a balance of $1000 and a student loan with a balance of $10,000. Some financial professionals would suggest you attack the debt with the highest interest rate first, but I’m going to disagree. In the debt snowball practice, I’m going to tell you to disregard interest rates and instead pay off the smallest debt first. Why? Because this will give you a small victory, help you develop a habit, and will also free up some money to really get the process rolling.
So let’s assume you have $650 budgeted to put toward your debt and that the minimum payment on your student loan is $300 and your car payment is $150. This leaves you with $200 to put toward your credit card, meaning it will be paid off in two months. Here’s where the snowball begins. Instead of using that $200 for other things, continue to put it toward the next largest debt—in this case, your car loan. So instead of paying $150 toward your car loan, you’re paying $350. Once that car is paid off, you can use the entire $650 to put toward your large student loan.
See how that works? You won’t have to change your lifestyle at all because you’ve budgeted $650. You’re simply using that budgeted amount to attack your debt in an aggressive and effective manner.
How to Get Started
The first step in the debt snowball process is to get organized and identify what your debts are and write down your monthly payments and balances. This will give you a roadmap for your project and will also help you decide which debt to take on first. The next step is crucial: don’t take on any new debt. You’re going to get a lot of pushback on this, from friends pressuring you to get a brand new car as soon as the old one is paid off to your parents putting pressure on you to buy a house and settle down already. Don’t let this faze you! If you stick to your guns, they’ll all be impressed when you’re debt free and living the life of your dreams in a few years and they’re still bearing the weight of debt. There’s a saying I like to tell the young adults I work with who are experiencing pressure from others to get into more debt: “Most people spend money they don’t have to buy things they don’t need to impress people they don’t like.” Makes sense, doesn’t it? When you get off the bandwagon, you’ll see that living a flexible life that is not dictated by the necessity to make money to pay off debt is much more important that trying to impress a bunch of people you don’t care about.
I’m passionate about helping young adults start their lives out right by getting out from under debt that could cripple their freedom. The debt snowball is one of the simplest and most effective ways to do this.
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