6 Secrets to Mastering the Debt Snowball

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You probably already know it makes more financial sense to pay off debts with the highest interest rates first, a payment method known as the debt avalanche.

But here's a surprise: A study published last year in the Journal of Consumer Research found that people were more likely to actually pay off their debts if they relied on the debt snowball method, instead. In this approach, you pay off your smallest debt first, followed by your next smallest, and so on — until you've paid off all of them. You take this approach without worrying about which debts have the highest interest rates.

Why does this method seem to work better? Researchers say it's about that all-important feeling of accomplishment. You'll get a rush of good feelings when you pay off a credit card, even if the debt on that card isn't that high. Yes, you'll pay more in the long run by not targeting debt with the highest interest rates first. But if the snowball method works better, and if you've long struggled with your credit card and other debts, you might be better off taking this approach.

So, if you're ready to give the debt snowball method a chance, here are some tricks to boost your chances of success.

1. Draft a Household Budget

Creating a budget doesn't sound like fun, but it's critical if you're ready to get serious about paying down your debt. Your household budget should include the money that flows into your home each month and the money you spend, including estimates for such discretionary expenses as eating out and entertainment.

Once you have a budget, you'll better know how much money you can allocate to paying down that smallest debt each month. Without a budget? You might be paying too much, putting yourself at financial risk. Or you might pay too little, dragging out the process of paying down your debts.

2. Don't Use the Card You're Trying to Pay Off

It might sound obvious, but don't add to the debt you're trying to pay off first. Don't use your credit cards to pay for anything. Follow your budget and pay cash or check for your allocated expenses. If you have a balance already on the card from the previous month, using it will immediately start interest charges on that amount. Nothing stalls your debt elimination process more than adding additional interest.

3. In Fact, Don't Purchase Anything You Can't Afford to Pay Off

You're going to have to get used to a different sort of lifestyle, and that means no longer buying things you can't pay off at the end of the month.

4. Automate It

When you're concentrating on paying off one debt quickly, it can be easy to overlook some of your other bills. You can avoid this, though, by turning to automated bill payment. If you find yourself overlooking your cellphone bill, create an automatic payment from your bank account to cover that bill each month. You can do the same thing with car payments, student loan payments, or utility bills. Do this, and you'll dramatically reduce the odds of paying one bill late while you're whittling down another.

5. Don't Waste Bonuses or Promotions

Are you in line for a bonus at work? Don't blow that money on a new laptop. Instead, funnel it toward the debt you are trying to pay off. There's no better feeling than lopping off a huge chunk of debt.

Or, maybe you've earned a promotion and a nice pay raise. Don't think that this gives you more spending money each month. No — until you pay off your debts, spending extra on fun shouldn't be a consideration. Instead, take the extra money you earn each month and use it to pay down your debt even faster. And then when you eliminate a student loan, credit card bill, or car loan, keep using that extra money to help pay down your next largest debt.

6. Consider a Balance Transfer Carefully

This strategy is only for those who are diligent and committed to paying off a certain amount of debt within a specific period of time. Credit cards offer new cardholders various balance transfer offers. Some have longer promotional periods (18-21 months), while others will waive the balance transfer fee (usually 3%-5%). Using a balance transfer to pay down credit card debt can save you a lot of money in interest. However, if instead you misuse this opportunity, by not paying off the debt during the 0% promotional period, and continuing to rack up debt on the cards you transferred balances from, you will find yourself in a crisis dealing with more accumulated debt than you started with, and at an even higher APR. (See also: 7 Important Things You Should Know About Balance Transfers)

Paying down debt is never easy. But if you remain committed, and you need a series of smaller, but quicker, victories, the debt snowball method can work. Just make sure to remain focused on that goal of eliminating each debt one at a time.

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