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| Reducing Debt Using the Snowball Method |
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| Written by Frank Bolsom |
| Friday, 12 September 2008 10:04 |
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There are multiple ways to reduce your total (and monthly) debt load, some less painful than others. One option that is sure to work is to simply pay more on your debts to reduce them. That is easier said than done and some feel it is impossible. One method that has proven successful is what Dave Ramsey has named the snowball method. The technique is, in essence, very simple. Order your debts from lowest to highest. Pay the minimum required on all monthly debts, then allocate any remaining funds you can to paying off the smallest debt. Thus, the smallest debt will get paid off first. This frees up yet more money to apply to the next-smallest (now the smallest) debt. Repeat until you have reached the level you want. There are a number of benefits to this method. You are able to quickly see results and in a short time can reduce your debt to a manageable level. As you pay off debts you have more money available to apply to remaining balances and can enjoy even faster results. Psychologically, this helps keep the debtor motivated to continue the program. Seeing real progress helps one stick with it during a financially challenging period. The snowball method does have one serious flaw. Because of compounding interest you will pay more on your debts in the long run. Compounding interest causes your higher debts to increase at a faster rate. That means that even if your lowest debt and your highest debt have the same interest rate, by leaving an outstanding balance on the highest debt for a longer period of time you will pay more interest than if the lowest debt was left outstanding. This means your overall repayment of interest will be higher. The way to overcome this flaw is to work your list in the opposite direction paying the highest debt first. By paying down the higher balances you reduce the interest that will compound on these and, as a result, the amount of overall interest you will pay. The problem with working the snowball method in reserve is that this way offers very little incentive to stick with it. The visible results come much slower and it takes a lot of self control to stick it out while trying to pay down those large balances. The reality is that because of the level of most interest rates, you will most likely still pay off your smaller debts first. Meanwhile you are making some pretty high payments each month. That takes a lot of self discipline. About the Author: Does your debt have you stressed out and constantly worrying? Stop beating yourself up and learn some simple but effective debt reduction tips. Visit http://www.debtsmackdown.com for plenty of helpful advice. Kindly provided by MoneyHunter.org You are welcome to use this article on your own website, if you include the link just before this text. |
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