Frugal Homesteading Blog

My husband and I are following the Debt Snowball approach on our journey toward debt freedom. We’re attempting to rid ourselves of college loans, credit card debt and a home equity line of credit used for buying our second home.

Here’s how the debt snowball works. It’s actually quite simple. When you’re getting out of debt:

• List your debts in order of smallest to largest. Don’t worry about the interest rates, as the important thing is to get your debt reduction rolling as fast as possible. It’s very motivating to pay off a debt and allow that momentum to carry into your next debts.
• Put everything extra toward your first (smallest) debt. Pay minimums on all but your smallest debt and put as much extra toward your first debt as possible each month.
• Once a debt is paid off, put everything you were paying on that debt each month toward your next smallest debt.

Critics of this approach say it makes much more fiscal sense to pay off the highest-interest debts first, and that you’ll save more money this way. However, those who prefer the smallest-debt-first method say the satisfaction of paying off each debt is so motivating they are inspired to pay off their debt more quickly.

Over at plonkee money, the blog editor has come up with a way to supercharge the debt snowball. It’s a great way to get the best of both worlds–the psychological satisfaction of making quick progress and the financial accomplishment of paying the least amount of interest possible.

So far, following the basic smallest debt first is working for us. We just had the satisfaction of paying off the final $200 of a $1,200 debt last week. My kids were so excited to see our debt ticker move one more spot. And I can’t wait till it moves again.

Have you started a debt snowball plan? Do you focus on the smallest debts or those with the highest interest rates?