556. The Snowball System for Clearing Your Debts

The best system I have found for clearing debt is what I call the Snowball system. I call it this because the amount of money you can use to pay off your debts increases (like a snowball) with each stage.

The first thing to do is to find an accelerator, an extra income that you can use to "get the snowball rolling". This could be a part-time job or a sideline business that pays for example €100 per month.

Next list out your debts in 4 columns, the payee, the amount owed, the monthly payment and the date of the final payment.

Now re-write the list in the order of how soon the debt ends.

Apply the accelerator to the nearest debt horizon (the one to be soonest paid off) and speed up the payments on that so that if you were paying €250 per month to this debt, start paying €350 per month until it is cleared. In the meantime, continue paying the normal repayments on ALL other debts. You must not rob Peter to pay Paul here by stealing the accelerator from other debts. This is very important. The accelerator must be genuine extra income or genuine extra savings from reduced spending.

Once the first debt is cleared, take the new full payment (€350 in our example) and apply it to the next shortest horizon debt (say this is costing you €500). You are now paying €850 off this debt and you continue to do this until all your debts are cleared.

Once cleared, you can then start applying all the money you were spending on debt to building up your investments.