Hit Your Debt With The Snowball Effect

There is a quote that goes, “If life gives you lemons – make lemonade.”

Replace the word LEMON with DEBT and LEMONADE with SNOWBALLS and you’ve just discovered one of the greatest wealth creation strategies around.

Let me explain.

In my twenties, being completely financially illiterate, I believed all the marketing hype – “You can have it all now!” and “Buy now, pay later.” I accumulated loads of consumer debt and walked into modern day slavery with my eyes wide shut.  

As I started earning money, even more money seemed to come my way. Everywhere I went I was offered store cards, charge cards, overdrafts and easy credit. 

Using borrowed money is easy to justify. “You are worth it.” “You need this to fit in.” “You’re a successful person now, good job, good salary, you need to look the part.“

My store cards were swiped so often they got hot buying the power wardrobe. I used credit cards to pay for vacations and accessories. I even got a bank loan to buy a white water kayak – which I used for one wild holiday, scaring myself half to death as I plunged down roaring rivers… and never used again.

It didn’t take long before I was
working for everyone else except me.

Worry and anxiety became my norm. I stressed that if I lost my job or wasn’t able to earn I wouldn’t be able to last more than a few weeks. All my dreams and all the adventures I had planned were put in a bottom drawer. I wondered if this is what the old folks meant when they said, fingers wagging, “Just wait till you get into the real world.”

The problem was the “real world” – the problem was that the world everyone else around me seemed to be living in wasn’t the least bit fun.

I knew there had to be another way and I decided to find it. I also read a great quote…

 ❝ If you find yourself in a hole – stop digging ❞

I realised that if I was ever going to get my life back and get out of this debt hole I had created then I had to put down the shovel – I had to stop using credit and spending money I didn’t have. I also knew that I had to do things differently from everyone else if I wanted to live the life I had always dreamed.

But making that key decision wasn’t enough. I had to find out how to actually do it! 

And so began my research. I read loads of books on getting out of debt and discovered that getting rid of debt is the number one New Years Resolution after weight loss – and is right up there with all those resolutions many people fail to achieve.

Why? After all, there is loads of advice on how to get rid of it.

➤ Many personal finance books suggested the same approach:

1. Rank your debts from highest interest rate to lowest interest rate.
2. Designate a certain amount of money to pay down debts each month.
3. Pay the minimum payment on all debts except the one with the highest interest rate.
4. Throw every other penny, pound, dollar, rand and cent at the debt with the highest interest rate.
5. When that debt is gone, do not alter the monthly amount dedicated to debt-bustings, but throw all you can at the debt with the next-highest interest rate.

This makes perfect sense. By following this approach you pay the least interest over the long term. 

The trouble is, the highest-interest rate debt is often the most difficult one to tackle. Focusing on this first is like climbing Everest when you’ve just learnt how to walk.

You may tackle it with determination and commitment but because it is such a giant it feels like you are getting nowhere; it wears you down until, defeated, you give up and go and buy something (on credit) to make yourself feel better.

The other thing that happens is that you get with one of life’s to-be-expected “unexpected” events – and because every pound, dollar or rand has been thrown at the debt destroying project there is no financial safety net to catch you… and so you have to use credit to deal with the emergency – wiping out all your good work and setting you and your motivation back to square one.

This happens over and over. Start and fail. Start and fail. It happened to me.

Then I discovered the Debt Snowball Method. This is similar to the traditional approach except that instead of starting with high-interest rate debt, you attack the debt which can be paid off the fastest. This often means low-balance debts first.

Why is this so much more successful? 

Because you’ll get the psychological lift of blitzing debts in rapid succession.

Logic says the first method is the best… but debt isn’t logical. Using logic alone doesn’t deal with the emotional side of indebtedness.  

We are not robots. As human beings, money and wealth are more about emotions than numbers – that is why we have to approach money matters in ways that make us feel successful.

Most of us know what we should do… but find it difficult to actually stick to what we know we ought to do. 

We humans are fantastic “should” machines – we all carry a burden of “shoulds” – but let’s be honest, “shoulds” just doesn’t work.

If we were logical, we wouldn’t accumulate consumer debt in the first place! It’s not helpful to tell somebody who is deep in debt that they must follow the repayment plan that minimizes interest payments. The important thing is to set up a system of positive reinforcement, a recipe which brings quick wins and provides the psychological support needed to keep going.

Success breeds enthusiasm and
reinforces our motivation.

That is why this makes all the difference.

➤ So let’s make snowballs!

1. Commit to claiming back your life, claiming back your dreams and the ultimate gift of all – freedom of choice.
2. Create a cash emergency fund of between $800 and $1,000 to use in the event of a real emergency __ so you don’t have to bring out the plastic again (and that pair of shoes is not an emergency!).
3. Rank your debts from lowest outstanding balance to highest outstanding.
4. Identify the minimum monthly payment you need to make against each debt.
5. Pay the minimum payment on all debts except the one with the lowest outstanding balance.
6. Commit to a lump sum amount to throw at your debt in addition to the minimum repayments. This is your Debt Destroyer Fuel (DDF).
7. Focus on destroying one debt at a time. Throw the full DDF at the debt with the lowest balance (in addition to its minimum repayment amount).
8. When that debt is gone, have a big celebration, congratulate yourself and focus on the second priority (the debt with the next-lowest balance).
9. Add the minimum repayment from your first debt (that has now been destroyed) to your DDF and add that full amount to the monthly repayment on your second debt.
10. In no time the second debt will have been destroyed too – and you will be feeling fantastic.
11. Continue adding the repayments from your destroyed debts to your DDF – it’s like a big snowball getting bigger as it rolls down the hill. Keep throwing the expanded DDF at each debt in turn until all of your consumer debts have been well and truly blitzed.

Every bit of consumer debt you wipe out adds to your net worth, increasing your wealth significantly. Celebrate your new wealth creation skills, embrace the challenge and claim back your life!

P.S. Make being debt-free your highest priority – do the Break Free From Debt Masterclass. When you do you will also get the powerful JFDI – 28 day “break free from debt” bootcamp – free.