The Snowball effect
Before I go into explaining how this works, let me clear up an important fact that seems to cycle in people’s minds. Contrary to popular belief it isn’t easiest to get out of debt by paying off your highest interest rate debt first. This is what many debt-ridden consumers tend to believe, but they are wrong (at least partially because the maths proves otherwise).
Credit card debt is wrecking people’s lives as we speak. The lure of the “easy money” ruins a lot of families because the owners of the credit cards are too weak to refrain from buying yet another thing they really don’t need. So what can you do if you are left starring debt in the face – debt that could result in a possible bankruptcy claim or the possibility of a divorce because money issues are so big and your family can’t handle them?
The answer is: use the snowball method
With the debt snowball method you put everything on hold financially, except the minimum payments and of course your utility bills and essential living expenses (and no, that does not include a subscription to Pay TV).
Before you start minimizing your financial expenditure try and save money for an emergency fund. Speed is of the essence here because remember, the interest clock is ticking.
Assemble all of your debts and create a spreadsheet where you list them in order of size. Start with the smallest debt first and work your way toward the biggest (most likely your mortgage). This is not the time, nor the place to worry about interest rates as the idea is to start paying down your smallest debt as soon as possible, then move on to the next, and so on.
The snowball starts rolling…
The moment your first debt is paid off – which shouldn’t take too long if you are dedicated – your snowball will gather pace and you will feel a massive sense of achievement. This will drive you to keep going.
Seeing results is psychologically important. It helps us to stay focused and result-driven.
…can you feel the rush of wind in your hair?
As you pay off more and more small debts your snowball will gather massive momentum. You will feel elated and actually start believing that is is possible to be debt free.
But it gets even better than that. If the exhilaration of the wind in your hair isn’t enough, how about the fact that you will start to compound your remaining payments as you pay off more of your debts. Money is funny that way!
Every single dollar you pay off your existing debt will help to compound the remaining amount. The more you pay off, the quicker your debt will shrink until there is…
… nothing left to pay. In which instance you would be debt free.
As long as you keep maintaining the minimum payments for your debts you will see results with the snowball method very quickly. It will be the start of the rest of your life and hopefully re-educate you on money management forever.
This is a guest post written by Timothy a personal finance writer for Credit Card Finder which specialises in providing credit card comparisons and information to help the consumer get into a better financial situation especially those in credit card debt.
I also recommend the snowball method to people. Even if it is true that the more financially savy would pay off high interest cards first, the psychological factor is very important as you mentioned.
As you pay off that first credit card you have less stress to deal with because there are less bill come into your mailbox. And besides, the difference in interest rates are probably negligible so there really is not much of a difference in how much money you will be paying for interest.
You then feel good about yourself, and since you have less credit cards that have debt on them, you will probably be more aware of your spending. If you have multiple cards with you, with balances on all or most of them, you will probably spend more because the spendings are split among the cards. It will seem as if you are spending less because you are splitting purchases between more cards.
Cheers,
Wahid
Yes, this method works very well. I have been following the Snowball method for 11 month’s now and have already paid off one card of $10,000.00 dollars,and am now starting on my next card!. I feel relief already, but i still have a while to go before all my debt has been paid in full ,but i will get there, now i know the method….. I’m looking forward to eventually being debt free , i know i can do it,bcause one card is already paid in full 🙂 !
All the best ,
Danza
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