Snowballing, or the debt snowball method, is a technique of debt management that is used to repay revolving credit like credit cards. It involves paying the debts with the smallest amount owed first using any available extra cash. It has been taught by many financial and wealth experts lately.

The basic steps of snowballing are as follows:

First, you list all your debts from smallest balance to largest. This is the most distinctive and counterintuitive aspect of the plan in that this order is determined by amount rather than interest. In other words you might be putting your highest interest account as your lowest priority.

Next you must pay the minimum on every debt on time every time.

On the smallest debt, you pay the minimum plus whatever extra you can afford until it is paid off. Some lenders may apply extra amounts toward the next payment whereas others will put it directly toward principal reduction. You may have to contact them to have them put it directly toward principal reduction.

Rinse and repeat until your debts are gone.

In theory, the amount toward the bigger debts will grow quickly as the smaller ones are paid off (you keep paying approximately the same every month in total). Thus the name—the amount you pay toward the larger debt grows like a snowball rolling down a hill, gathering more and more snow as it rolls along.

The theory is as much rooted in human psychology as it is in financial theory. By paying the smaller debts first, you see fewer bills, and this reinforces the psychological impression that you are making progress, which is very valuable in keeping you on the plan.

You won’t typically include your home mortgage in the debt snowball, that is typically paid according to a different plan in a later step. Many financial plans pay off those mortgages in a later step. This is for debts that are greater than half of one’s annual take home pay.

Whether one should make retirement contributions during the debt reduction process is a matter of dispute among proponents of this method, because some contend that contributions should be halted on the grounds that greater gains are made by paying debt, and others compromise by saying the contributions should be reduced to the minimum amount in order to get matching but not eliminated, but most experts say the halting should not last more than two years.

People with a lot of financial discipline may choose to pay off their higher interest rate debts first. Ultimately, this will cost less in interest payments than the smallest balance approach, but lacks the psychological advantage of showing perceptible progress in paying off your debt.

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Almost certainly, you have heard the term “high net worth individual” bandied about almost every day. But do you understand what net worth really means?

In simplest form, net worth is defined as the difference between the value of what you own—your assets—and the amount that you owe—your debts. If you sold everything you own, and paid off all your debts, it’s the amount of cash you’d have in your back pocket, in simplest terms.

Basically, net worth is just a way of describing and measuring how wealthy you are. Knowing your net worth is an important first step in figuring out your financial goals and building your long and short term financial plans. Overall, your financial goal should be to increase your net worth over time.

Obviously, to calculate net worth, you need to subtract what you owe from what you own. In order to figure out what you own, however, you need to know what the various kinds of assets are.

The first type of assets to consider is tangible assets. In other words, tangible assets are your stuff. Your house, if you own it, your vacation home, if you have one and own it, your car or cars and other vehicles, any rental properties you own, and your art, jewelry and other valuables. Generally, it’s only worth what someone would pay for it, so if you think something like your DVD collection is really cool it’s still only worth what someone would pay for it on eBay.

The next type of assets are equity assets. These are things like stocks, variable annuities, limited partnerships, and business interests. They can be things that generate income like stocks, or things that represent an ownership stake in the successful outcome of any business, such as business interests. From a net worth point of view, though, what matters isn’t projected income but the asset’s worth at the moment of calculation.

Fixed principal assets are things like trust deeds, fixed dollar annuities, and other fixed principal assets. Fixed rate assets are things like government bonds and securities, municipal bonds, corporate bonds face amount certificates, and also debt mutual funds. Cash and check equivalents include your checking accounts’ balances, your savings accounts, your money market funds, your certificates of deposit, and other cash reserve accounts.

There are various types of liabilities as well. For example, there are home mortgages or other mortgages. A mortgage is a very specific type of secured debt. Automobile loans are another type of secured debt. Bank loans and personal loans may be secured or unsecured, depending on whether you had to put up collateral to get them. Last, there’s unsecured debt—that’s debt which you didn’t have to offer any assets as collateral to take out, such as credit card debt.

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We all know people who always want to pay cash and they refuse to have any debts. “Having no debts is the first step to be rich” they say. They might be right when we look it on an interest charges point of view. However, at one point or another, these individual will have to fill in a credit application for a car purchase or a mortgage.

The thing is that credit is based on trust. And trust is gain through a series of positive experiences with one individual. Would you get married with someone you met yesterday even if it’s “the love of your life”? Credit relationships with banks work exactly the same.

The very first thing that a financial institution will do when you apply for credit is to look if you are credit worthy. In order to do so, they will pull out your credit bureau. If you never had a credit card and no other credit experiences as such, it’s like you don’t exist in the banking / credit system.

Having a positive balance in your banking account and paying your utility bills on time is completely useless for credit reporting agencies. They will only look at credit cards, lines of credit, personal loans, leases and mortgages.

If you had a bad credit experience, at least your behaviors are recorded and you can always try to explain your credit misbehaviors. When you don’t exist in the credit bureau, you can’t explain much!

No banks will accept to trust a complete stranger. Therefore, you should seriously consider applying for a small credit card (i.e. with a $500 limit) and use it once in a while. You don’t even have to pay interest charges on it as long as you pay your credit card statement on time when you receive it.

This will at least show some credit record when you apply for a bigger loan and you will have the possibility to earn points and rewards at the same time.