Going to college is a fantastic experience, but with it comes immense debt for many individuals. If you've graduated with student loans, credit card debt and other debts, you may wonder how you'll ever pay it all off. One technique is a debt snowball, which could help you get back on track with your finances.
How does it work? Here are a few tips.
1. List out your debts
The first step of the debt snowball is to know what you owe. Write down all your debts and how much they are. List their interest rates and minimum payments.
2. Decide on an order for paying off the debts
Money is usually limited when you have many debts, so start by deciding which debt you can pay off first. For example, you might want to pay off a small $400 credit card, or your goal might be to pay off a $1,000 loan with an 18 percent interest rate. Some people prefer to pay off the smaller amounts first, while others opt to pay larger loans and debts first. It's up to you, but whatever you decide, stick with it.
3. Don't forget to pay your minimum payments
Make your minimum payments every month, but put extra money down on the debt you want to pay off. Even if it's only an extra $10 to $20 each month, that quickly adds up. For example, if your minimum payment (assuming zero percent interest) pays off $100 each month, then you pay off $1,200 of debt in one year. However, if you pay $110 a month, you'll pay off $1,320 in a year.
It might not seem like a major difference, but when you start adding in interest rates, it does add up quickly. In either case, the debt is gone faster than if you paid less over a longer period of time.
4. Pay off one, then another
After you pay off your first debt, take the money that you paid each month on it and put that money toward the next debt. This is when the debt snowball finally starts moving quickly. As you place more and more of your income toward each individual debt, you'll see each decrease much more rapidly than if you made only minimum payments.
Continue to do this until each debt is paid in full, and you'll have a life without debt and the freedom to use your entire paycheck toward the things you need, savings and the things you want to do.
Not everyone has the financial stability to start a debt snowball, and sometimes making any payment on time is a difficult task. A legal professional has more information on options, such as bankruptcy or credit counseling, which may work well for you.