Reducing Debt Using The Snowball Method
There are many different ways in which you can reduce both the total and monthly burden of your debt but the secret is to find a method which is simple and which you will be able to stick to month after month until your debt is cleared. One such method which has been used by countless debtors with great success was devised by Dave Ramsey and is known as the ’snowball’ method.
To use the snowball method you start by listing out all of your debts starting with your smallest debt and ending with your largest debt. At the same time you make a note of the minimum which you are required to pay each month for each debt and the total amount of money which you have available for debt repayment. This is not simply the total of all your minimum monthly payments, but the sum of money which you can afford to set aside from your income to repay your debts after all of your other monthly expenditures for such things as food, transport and everything else are taken into account.
You then pay the minimum monthly payment on all of your debts except for your lowest debt which receives the minimum payment plus the balance of the funds from the total amount of money set aside for debt repayment. In other words, if the total of your monthly minimum payments is $150 and you have allocated $200 for debt repayment your smallest debt will receive its minimum payment plus an additional $50.
This way your smallest debt will be paid off first (hopefully quite quickly) and your second smallest debt will then replace it and in turn receive its share of the additional funds. However, since your smallest debt has now disappeared you will also free up its minimum payment and the balance that was being used to pay it down quickly to now accelerate the payment of your new smallest debt.
The great beauty of the snowball debt reduction method is that it produces visible results in a relatively short period of time and this provides a great psychological boost for you to continue with it.
This method does however have one drawback.
Although progress appears to be fast at first it will take you longer to clear down your debt completely than some other methods and cost you more in the long run. This is simply because, assuming that your debts all have relatively similar rates of interest, you will end up paying your largest debt for the longest period of time and thus paying your highest monthly interest charge for the longest period of time.
One way around this of course is to reverse the process and pay down your highest debt first and your smallest debt last. In theory this makes perfect sense but, unfortunately, in practice it rarely works because you do not see any appreciable reduction in your debt in the early months of repayment and so it is difficult to stick with this plan. If you have the discipline then it is the road to choose but, if you are like most people and need the psychological boost of seeing tangible progress in the early months of your debt repayment plan, then reducing debt with the snowball method is a great route to take.
