Great thread guys!

Hey HJM331, that is the only way I have heard of it also. You both are actually correct.

Here's the definition for debt-snowball:

The basic steps in the debt snowball method are as follows:

• List all debts in ascending order from smallest balance to largest. This is the method's most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.
• Commit to pay the minimum payment on every debt.
• Determine how much extra can be applied towards the smallest debt.
• Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
• Then, add the old minimum payment from the first debt to the extra amount, and apply the new sum to the second smallest debt.
• Repeat until all debts are paid in full.
• Some lenders will apply extra amounts towards the next payment. Be sure to contact them and tell them you want your extra payment to go directly toward the principal.

In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name). The theory works as much on human psychology as it does on finance; by paying the smaller bills first, the individual, couple, or family sees fewer incoming payment requests as more bills are paid off, thus giving ongoing positive feedback on their progress towards eliminating their debt.
All retirement contributions are to be halted during the debt snowball, thus freeing up more money to pay down the debt snowball. Many dispute this practice, citing the cost of compounding interest to be greater than the gains of paying off debt. Some compromise by reducing retirement contributions to only what a company will match with an employee. Many financial and wealth experts teach that this halting of retirement contributions should last no more than two years.
A first home mortgage is not generally included in the debt snowball, but is instead paid off as part of one's larger financial plan. As an example, many financial plans pay off home mortgages in a later step, along with any other debt which is equal to or greater than half of one's annual take-home pay.



Source]http://en.wikipedia.org/wiki/Debt-snowball_method[/url]

I have. Dave Ramsey of www.daveramsey.com is a big proponent of this. I have 2 of his books and listen to him on the radio from time to time. He advocates this:

1. First, before starting the snowball or any type of debt reduction plan, put away $1k emergency fund and it can't be in a CD or stock, it must be liquid i.e checking/savings account. His reasoning is that something always comes up whether it be that your brakes or batteries go out, or the water heater in the house bursts or whatever, one must be ready to have readyily available money to pay for lifes little bumps which is one of the main reasons why people get derailed from their debt reduction plan.

2. He does not believe in paying the highest interest rate card first which some financial people advocate. I agree with him. His reasoning is that people need to see what they are working towards and when they can see that they just paid of that $300 Orchard Bank credit card, it provides a psychological boost. He says to pay the minimum on all the other credit cards and then pay the most that you can afford on the smallest credit card balance.

When you have paid that off, eg if you were paying $50 on Orchard Bank, take the $50 and apply it along with the minimum payment of the next smallest balance and so on and so on.

This is a good plan. However the rest of his teachings, I don't really subscribe to. He advocates NO credit cards only a debit card. He advocates paying by CASH/CHECK/DEBIT card only. He says not to worry about a FICO score.

He advocates not purchasing a home with a payment more than 25% of your income. I don't know where that situation exists for most people. He does advocate tithing and he is a Christian which is perfectly alright with me.

He says that most people are living above their means and if you have financial problems and the creditors are callling, get a second job, eat rice and beans and don't let the collection agencies bully you. He calls them bottom feeders. He says, never , ever, ever, give them access to your checking/saving account and get everything in writing.

I was talking to someone today and they mentioned this method of paying down debt called debt snowballing. The way they explained it to me was that you pay more on the lowest debt until you finishing pay it off (you would still be paying down on your other debts of course). Then you take the money that was applied to the debt that you just paid off and add it to the next debt and so on until all of the debts are paid. They said that it would work very well for credit cards. :

Just wanted to know if anyone here has heard of this method of paying down debt or if someone has used it?

TIA,
rwmtd