Reducing Debt Using the Snowball Method
When it comes to reducing overall debt and monthly debt, there are many options to consider.
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.
This method is in no way technical. Simply organize your debt from least to greatest. You pay only the minimum payment on every debt with the exception of the lowest debt. Any excess income should be put toward the lowest debt which will enable you to eliminate that debt first. Once eliminated, the minimum payment that once was allocated to your lowest debt can be applied to the next debt in line for payoff. You continue in the same manner until you have decreased your debt to the desired level.
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.
The visible results give incentive to stick with it. Even during trying financial times you will want to continue.
But, for all its virtues, the method does have one real drawback. It actually requires more time (and money) overall to pay off all your debts that way. The reasons have to do with how interest compounds.
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 difficulty is that the latter method, though more cost effective in the long run, is harder for most people to stick to. It takes a lot of discipline to live with that debt burden as you slowly reduce the $10,000 debt.
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.
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