Debt Reduction - Snowball Method
By Daily Dosh | December 3, 2007
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.
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Are Low Interest Credit Cards Worth It?
By Daily Dosh | December 3, 2007
It may seem that credit cards can be both saviour and destroyer but ultimately you should view them purely as a tool. Of course, how you choose to use them is up to you.
Handy Tool - If used properly they can come in very handy, they can be used for online shopping where you can’t simply hand over a wad of cash. It’s also great if you feel uncomfortable about carrying large amounts of money in case you are mugged. Alternately you may use your flexible friend to run up huge debts you’ll struggle to repay and the interest rates can be crippling.
Use it for Debt Consolidation - For a number of people who find themselves with bigger credit card bills than they can cope with, debt consolidation is the answer. Many card issuers will present you with offers that sound too good to be true. Simply collect all your credit card debt onto the one card.
Be careful about these ‘low interest rates’, they are often only given to those with good credit history. And if you’re having financial troubles, chances are your credit score is less than perfect.
In saying that they can be a good long term solution and the only way to know if they’ll accept you is if you actually apply. If you are accepted there are a number of things to consider:-
End Up Paying More - It is unlikely that these credit card offers will lower the total amount owed. This means you’ll still have the same amount of debt. You may even end up paying more in the long run. If you pay 8% on a debt of $10,000 for, say, five years you will pay more than paying 10% on $10,000 for two years.
The reason is the compounding effect of interest. The total amount of interest paid in the first case is $2165.60. The net interest rate overall is 21.656% when calculated as the percentage paid beyond the principal. In the second case, you pay only $1074.80, with a net interest rate of 10.748%.
It’s important to note that you are paying an annual percentage rate (APR) which means this is the amount you pay each year - it is not the total you pay over the life of the loan,
The advantage of paying 8% over five years is that the monthly amount is only $202.76 compared to $461.45 per month if the interest rate is 10% over 2 years. Think about what you can afford to pay after all your other expenses. Use one of the many online calculators to find out what is the optimum level of interest and loan term for you.
Further Finance Reading:-
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Do You Need a Debt Counselor?
By Daily Dosh | December 1, 2007
Everyone has different attitudes toward debt. Some people accept it and think it’s normal whilst other people find it embarrassing. Whatever type you are you should always seek professional advice. For some people this is a debt counsellor.
Debt counsellors receive special training to help those in a difficult financial situation. They have a vast knowledge of all the possible remedies you can take to get things back on track. Remember, there are a number of unscrupulous companies out there eager to take your money and run. A debt counsellor will be able to advise you who to go to and who to avoid.
Not only with they offer practical advice, they’ll also be able to offer a helping hand. Dealing with excessive debts is undoubtedly stressful and can seem more difficult than it really is. Going to a third party can give you that reassurance you may be lacking.
It may seem that when you are in debt there is no escaping. Everything can seem doom and gloom and it’s difficult to muster that willpower to get you through. It may be that you suffer willpower which is how you got into debt initially.
Debt counsellor deal with people like you everyday and know that financial freedom is possible. As long as you set out a workable program, realistic goals as well as reminders of sticking to it there’s no reason why you can’t succeed.
Be aware that a debt counsellor isn’t there just to wave a magic wand and make everything better. You cannot rely on them to do everything for you. They are great for getting thing set up and pointing you in the right direction but ultimately you need to learn to do things for yourself.
Money management is not something that everyone is talented at. However you can learn this skill at any age. As long as you have some basic mental arithmetic or a calculator you should be able to deal with it. The main problem is breaking through the emotional barrier.
No matter how good the advice you receive, it’s all worthless unless you act upon it. Ultimately this is your responsibility.
Further Finance Reading:-
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