Thursday , 28 March 2024

Which “Snowball” Debt Reduction Method Is Your Best Choice? (+2K Views)

What is the best way to reduce debt? The most-efficient means is probably the snowball method. There are two main variations of the snowball method, but you must consider your personality to determine which of the two is right for you. [Let me explain.] Words: 1251

So says Jeffrey Strain (thestreet.com)  in his original article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Strain goes on to say:

The Classic (Rational) Snowball Debt Reduction Method:

The classic snowball debt reduction method works as follows:

  1. Make a list of all your debts, ordering them from highest interest rate to lowest interest rate.
  2. Set aside a specific amount of money that will go toward paying these debts each month.
  3. From the amount you set aside, make the minimum payment on all debts. Whatever money is still left over goes toward the debt with the highest interest rate.
  4. When you finish paying off the debt with the highest interest, continue the same method. You make the minimum payment on all debts, and all of the extra money goes toward paying down the debt with the now-highest interest. The payments made toward the first debt that was paid off get “snowballed” into the next-highest-interest-rate debt.

This is the most efficient way to pay off debt, as you will pay the least amount in interest charges by reducing debt this way. This is the reason most financial experts recommend this method.

The problem is that for many people, it’s not necessarily the most practical way to approach debt reduction. This is due to the fact that people don’t always use money in a rational manner but instead use money emotionally. If everyone viewed money in a purely rational way, there would be far fewer people in debt than there are today.

The Alternate (Emotional) Snowball Debt Reduction Method:

If your largest debt happens to be the one with the highest interest (which is common), you could end up feeling that paying off that amount of debt is hopeless since it’s so huge and daunting. Many people begin the debt reduction process but after several months don’t see any significant progress being made. If they don’t feel as if they are accomplishing anything, they get frustrated and give up.

Since the main goal of debt reduction is not only to reduce debt in the quickest possible way but also to make sure that the debt is actually reduced, it’s important to understand the way that you view money. If you view money emotionally, then a better way to reduce debt might be to focus on the debt with the least amount of money to be paid off. In such a case, you would approach the snowball method in this fashion:

  1. Make a list of all your debts, ordering them from lowest balance to highest balance.
  2. Set aside a specific amount of money that will go toward paying these debts each month.
  3. From the amount you set aside, make the minimum payment on all debts. Whatever money is still left goes toward the debt with the lowest balance.
  4. When you finish paying off the debt with the lowest balance, continue the same method. Make the minimum payment on all debts and then put all of the extra money toward paying down the debt with the now-lowest balance.
[The above] version of the snowball debt reduction is not as efficient as the classic version. You will end up paying more money in interest charges using this method. What this method gives, however, is a sense of accomplishment much more quickly than the classic method oftentimes does. If you view money emotionally, being able to pay off a debt quickly will give you an emotional and psychological lift and keep you motivated to tackle the remaining debts.

Conclusion

These two snowball methods are not the only choices, but they provide a good foundation on which to begin. You should adjust them to your own personal needs and circumstances. You might have a debt with neither the highest interest rate nor the lowest balance, but it’s a balance you would want to pay off first. For example, if you’ve borrowed money from a family member, you might want to pay off that debt first to keep family relations running smoothly. Take whichever of the two methods fits your style best and adjust it if needed.

In the end, the most important issue is to make sure you begin reducing the debt. Take a good look at your personality and decide whether you are more rational or emotional when dealing with money. While you want to choose the most efficient method of debt reduction, you need to make sure that the method you choose will work for you until all your debt is cleared.

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*http://www.thestreet.com/story/10352440/3/using-the-snowball-to-melt-debt.html

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