By Lorimer Wilson ——Bio and Archives--September 17, 2011
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The classic snowball debt reduction method works as follows: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.
- Make a list of all your debts, ordering them from highest interest rate to lowest interest rate.
- Set aside a specific amount of money that will go toward paying these debts each month.
- 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.
- 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.
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:[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.
- Make a list of all your debts, ordering them from lowest balance to highest balance.
- Set aside a specific amount of money that will go toward paying these debts each month.
- 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.
- 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.
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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<em>Lorimer Wilson is the Editor of munKNEE.com
Lorimer is also a writer, analyst and commentator on the economic, financial and investment environment around the world and has recently been identified as the 12th most-read such writer on the internet out of over 500 frequent contributors.
His articles are unique, insightful, informative, instructive and well researched analyses of the economy and marketplace and posted regularly on more than 50 financial sites at the present time.
Lorimer also is an accomplished editor posting edited excerpts of other author’s articles on his site to provide his visitors with a fast and easy read of some of the best articles to be found on the internet on any given day.
His editorial skills are available for hire should you have an article, book or other written material that needs to be fine-tuned before publication. </a>