Results 1 to 1 of 1

Thread: debt snowball

  1. #1
    Deal GURU
    Join Date
    Sep 2008
    Blog Entries

    Default debt snowball

    The Fastest Method of Paying Off Debt

    The Debt Snowball is the most talked about method of paying off debt. That's because it works. It's recommended by recognized financial experts such as Dave Ramsey and The Motley Fool, although there's some disagreement about one of the basic premises of the Debt Snowball - whether to start paying off the smallest debt first or the one with the highest interest rate.
    A brief argument for each method is at the end of this article so you can choose for yourself. I'll use the Motley Fool method. Although I see the merit in the Dave Ramsey method, I lean towards paying off the debt with the highest rates first because it saves you the most money over time.

    How the Debt Snowball Works
    List all of your debts, in descending order by interest rate, regardless of the balance (accounts with highest interest rates first).

    Determine the most money you can make available from your budget to apply to the debt snowball. The more you can apply, the more money you'll save and the faster you'll pay off your debt.

    Each month, apply the minimum payment PLUS the extra money you've made available from your budget to the first debt (the one with the highest interest rate). On all your other debts, pay only the minimum payment. Continue to do this until the first debt on the list is paid off.

    Take the minimum payment AND the extra payment you were making on the first debt and add them to the minimum payment you've been paying on the second debt. Pay that amount on the second debt each month until it's paid off, then move on to the third debt. Continue to pay only the minimum payment on all debts except the one you're "snowballing."

    Repeat this process until all of the debts are paid off.

    It doesn't take long before the payment you're making on the targeted debt becomes quite large, as you add the payments you were making to all the other accounts (that you've now paid off) to the payment on the debt you're now focusing on. Your cash flow remains the same throughout the process but the monthly payment you make to the targeted debt grows larger and larger.

    Several Web sites provide online Snowball calculators so you can see for yourself how the Snowball would work for you. The Snowball Calculator allows you to enter up to 20 debts and will show you which debts to pay off first, and the amount of the payments. The Debt Snowball Calculator allows you to order your debt in several different ways to see you much you'd save under each method.

    Many people have testified as to how well the Debt Snowball works. It just takes motivation.

    The Two Methods of Using the Debt Snowball
    Dave Ramsey and some others recommend listing your debts with the smallest balances first so you can get the emotional satisfaction of quickly crossing off a debt or two, in the hopes that this emotional satisfaction will keep you motivated. There's some merit in this approach but if you already know you are motivated to stick with the Snowball, you'll be better off using the method below.

    Other experts recommend listing your debts with the highest interest rate first so you can save the most money by reducing the debts that grow the fastest due to the interest added every month. There may be personal considerations that would motivate you to pay off another debt first (such as a family loan that is late or is causing tension in the family), but in general you would follow the payment by highest interest rate method.

  2. The Following 8 Users Say Thank You to mdowdy For This Useful Post:



Tags for this Thread

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts