Debt Snowball Effect

Document created by simplym3gs on May 25, 2016Last modified by amara.mastronardi@socialedgeconsulting.com on Dec 5, 2016
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I have just recently finished a financial class that Dave Ramsey provides, called Financial Peace University. One of the best budgeting take-aways I had gotten was called the 'Debt Snowball Effect.' What this does is allows a person to prioritize their debt from smallest to largest bill. The person would make their monthly payments on all the bills they could going in order of the list (minimum payments) that the person's budget would allow. Once the top bill was paid off, the person would then apply that minimum payment plus the next bills minimum payment for that next bill (which would then be at the top of the line). It would look like this:

 

credit card 150 balance, 35$ minimum payment

credit card 300 balance, 35$ minimum payment

350 balance, 55$ minimum payment

car 12000 balance, 265$ minimum payment

house 120000 balance, 1200$ minimum payment.

 

The person would pay as much as possible on as many bills as possible (within their bill budget) Once the first credit car was paid off with a minimum payment of 35$, they would apply that 35$ plus the next credit card minimum balance of also 35$ to that one card making the new minimum 70$ rather than only 35$, paying off that bill two times as fast. The person would follow that pattern for each bill that is next in line. The next debt, medical bill, would then have a minimum payment of 70$ plus the 55$ making that new minimum payment 125$, getting this bill paid off three times as fast, and so on.

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