Start the Debt Snowball Rolling

When a snowball rolls downhill, it gathers more snow. The larger it gets, the faster it rolls. The faster it rolls, the more snow it picks up. Reducing and eliminating debt works much the same way.

Here are some simple tips for getting yourself out of debt that I learned from financial guru Dave Ramsey, whose radio show, Financial Peace, is one of the most popular of its kind in the nation. Ramsey refers to the process we're discussing as "the debt snowball."

1) List all creditors on a sheet of paper. This list should include your home mortgage, any auto loans, bank loans, credit card debt, medical bills, student loans and any other money owed, whether the amount is large or small.

It's important to include every debt you have. If needed, go back through your checkbook to refresh the memory.

2) Next to each item, write the total balance remaining to be paid and also include the monthly payment. There is no need to write down the interest rate you're paying. More on that later.

3) Arrange the debts in order from the smallest remaining balance to the largest remaining balance. We're not talking about the monthly payment, just the remaining balance.

Let's take a look at an example. At this point, your list should look something like this:

Hospital: $100 remaining balance; monthly payment of $25.
Credit card: $300 remaining balance; monthly payment of $50.
Car: $1,500 remaining balance; monthly payment of $200.
Student loan: $2,500 remaining balance; monthly payment of $75.

4) After you've budgeted for keeping these bills current and once your list is arranged, the next step is to determine how much extra money you can budget that will be used only for paying off debt. Let's say, for our example, that amount is $300 per month.