Debt Reduction - Snowball Method

So you’re looking to reduce you total/monthly re-payments? The initial thought is to pay down the debts. This is not easy and some find the situation hopeless. One method that can be used in the “snowball method”, a term coined by Dave Ramsey.

On the whole this technique is pretty simple. List your debts from the lowest to the highest. Every month pay the minimum amount required for each of your debts. With the amount left over start paying off the smallest debt. When that has been paid off, move to the 2nd smallest. Keep doing this until you have reached the level is wish.

There are several advantages to this. Physiologically you can see the progress you are making in reducing the debts fairly quickly. As you cross off these debts you can split your money between paying off the next debt on the list as well as treating yourself to a few things.

You will feel that you are achieving something and this will spur you on to complete the program. Being able to see real progress will help you stick at it.

Unfortunately the system isn’t perfect. It takes longer and therefore costs you more money. It all comes to how interest compounds.  Of course, you should still consider the Dave Ramsey method all the same.

If you pay off a $500 debt, a $1,000 debt and a $5,000 debt they may all have the same rate of interest. However paying off the smallest amount first actually costs you more in the total interest paid. Because any outstanding amount is charged at the same rate of interest, the higher amount will incur the largest charge. Ultimately you will pay more in total interest charges.

If you want to save money in the long term then it is actually better to pay the highest amount first. As you pay down the highest debt first, you are reducing the amount of interest dollars paid over time.

The problem for most people is that it is harder to stick to this sort of re-payment plan. It requires more discipline as you gradually reduce the $5,000 debt.

The main problem people have in paying debts is will-power. If this is something you suffer from then the snowball method is probably a good choice. Even despite the fact it’ll cost more over time.