Debt Snowball MethodDebt Reduction Using The Debt Snowball MethodHowever, radio talk-show host and best-selling author Dave Ramsey gave the name to the "Debt Snowball Effect," and it has proven to be a successful debt reduction method for many people. The technique he advocates is actually quite simple. First, arrange your debts in order from the lowest amount to the highest. Pay the minimum payment required on all monthly debts, then apply any remaining funds to paying off the smallest debt as circumstances permit. Thus, the smallest debt will be the first to get paid off. Once the smallest debt is out of the way, there will be more money freed up to pay off the next-smallest debt, and so on. Momentum is soon gained. Simply repeat the process until all debts have been paid off, or until you reach a reasonable level of debt. The AdvantagesThere are real advantages to this snowball debt reduction method. You get to see steady progress in reducing your debt load as you pay debts off one by one. Soon, you could be down to a reasonable level of debt that is much easier to manage. The more debts you pay off, the more income becomes available to apply to the debt next in line.However, you could also choose to take a little of that extra income and reward yourself. A small reward now and then offers a psychological advantage. The reward coupled with seeing real progress in lowering your debt load helps to keep you motivated during the financially difficult times. Make no mistake, there will be times of discouragement. The larger debts will appear to take forever to pay off, and you will have to exercise patience and resolve. But stick with the method. It works! The DrawbackThe single big drawback to the Debt Snowball method is that it takes more time and money to pay off all your debts because of the way interest compounds.For example, let's say you have a $1,000 debt, a $5,000 debt, and a $10,000 debt; all at the same rate of interest. Paying off the $1,000 debt first will cost you more in total interest paid. The higher $10,000 debt will incur the largest interest charge. Therefore, over time, you will end up paying more in total interest charges. Reverse Debt Snowball MethodWhat about reversing the order and paying off the largest debt first? Doing so will save you money in the long run. The amount of interest paid over time is reduced by paying down the largest debt first.However, the drawback to this approach is that though money is saved in the long run, most people find it harder to stick to the plan. Much discipline is needed to live with the overall burden of debt as the $10,000 is slowly whittled away. Progress seems slower than it really is, and discouragement can result. As interest rates and minimum payments go, the smaller debts will gradually get paid off, often before the larger debts, but you will need to make high payments each month and that requires lots of motivation and willpower. And people who are burdened with debt find it very difficult to generate the kind of willpower that's needed. Often, it's that lack of willpower which led to extreme debt in the beginning. The Best OptionThe basic Debt Snowball method, however, offers a definite advantage for people who would find it difficult to pay off the larger debts first; it's the best option for snowball debt reduction. Although more interest will be paid out over the life of the combined debts by paying off the smaller debts first, the debts will stand a much better chance of being retired.Use the free Debt Snowball Calculator that I've provided for you on this website to find out how the Snowball Method would work in reducing your current debt load. TOP of Debt Snowball Method RETURN to Eliminate Credit Card Debts HOME to Get The Best Credit Cards
|
