Article Categories
» Arts & Entertainment
» Automotive
» Business
» Careers & Jobs
» Education & Reference
» Finance
» Food & Drink
» Health & Fitness
» Home & Family
» Internet & Online Businesses
» Miscellaneous
» Self Improvement
» Shopping
» Society & News
» Sports & Recreation
» Technology
» Travel & Leisure
» Writing & Speaking

  Listed Article

  Category: Articles » Finance » Personal Finance » Article
 

How to Pay off Your Debt With Debt-snowball Method




By Cornie Herring

Nearly every financial adviser always advises that debts should be paid off in a particular order: from highest interest rate to lowest interest rate. While this method makes sense from a mathematical point of view, it makes less sense from a psychological point of view.

Psychologically, 7 outstanding debts feels more overwhelming than 2 outstanding debts even if they are at the same total balance. Many people are struggling with debt and have tried on several abortive attempts to eliminate their debt using the highest-to-lowest method, and each time they failed. Why?

Because this payoff plan does, indeed, make the most financial sense if you have the discipline to adhere to it. By paying off the high interest rate debt first, you are minimizing the total you will eventually pay in interest. But this method does not work for everyone.

For many debtors, their highest interest rate debt was also their debt with the highest balance. Psychologically, they felt defeated; they could pay on this debt for months at a time and never seem like making the progress.

Dave Ramsey, the financial expert and the nationally-syndicated talk radio host of The Dave Ramsey Show has introduced Debt-snowball Method as the alternative to the highest-to-lowest method in paying off the debt. His method had been recognized to make more sense from a psychological point of view.

How's Debt-snowball Method Work?

The basic steps in the debt snowball are:

    List all debts in ascending order from smallest balance to largest. Commit to pay the minimum payment on every debt. Determine how much extra can be applied towards the smallest debt. Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off. Then, add the old minimum payment from the first debt to the extra amount, and apply the new sum to the second smallest debt. Repeat until all debts are paid in full.

In theory, by the time the final debts are reached, the snowball will be rolling quickly as it has picked up a lot of financial mass. Hence, larger debts will be paid off faster.

Let take an example to illustration the Debt-snowball Method. Assume a typical young woman in her mid-twenties who awakes one morning to realize that she's in debt and decides to do something about it. She might be burdened with the following hypothetical liabilities:

    $30,000 college loan at 5% $10,000 credit card balance at 12% $2,000 computer loan at 10% $3,000 car loan at 4%

The highest-to-lowest method would advise her debt to be paid off in this order:

    $10,000 credit card balance at 12% $2,000 computer loan at 10% $30,000 college loan at 5% $3,000 car loan at 4%
But, using the Debt Snowball method, she should organize her debt from smallest balance to largest balance as follow:
    $2,000 computer loan at 10% $3,000 car loan at 4% $10,000 credit card balance at 12% $30,000 college loan at 5%

After you have listed your debts from smallest to largest; pay the minimum amount on all of them except the smallest. Throw every dollar you can scrimp and save against your smallest debt until it has been eliminated, then move on to the next-smallest debt.

Summary

In short, the Debt-snowball Method is another method to help a debtor to clear off his debt in more psychological way: by reducing the number of debts first as compare the total debt amount. Those who are unsure of their ability to stick with the plan may want to pay the smallest debt first, because the thrill of eliminating an entire balance sooner may encourage them to continue.


 
 
About the Author
Cornie Herring is the Author from StudyKiosk.com. StudyKiosk-Credit Basics is an informational website on credit basics and debt consolidation. To see recommended, credible lenders and loan service companies, visit Recommended Bad Credit Debt Consolidation Services and Lenders.

Article Source: http://www.simplysearch4it.com/article/44308.html
 
If you wish to add the above article to your website or newsletters then please include the "Article Source: http://www.simplysearch4it.com/article/44308.html" as shown above and make it hyperlinked.



  Some other articles by Cornie Herring
When Your Credit Score Become Important?
Have you ever wonder why your online application for credit can be approved in 60 seconds? Or get pre-qualified auto loan for ...

Get To Know The Bankruptcy Filling Process If This Is Your Option
Filing for bankruptcy is a very personal decision. Heavy debtors may choose to file a bankruptcy if they see no other way out from their heavy debts. ...

Payday Loan Is High Cost Cash, Avoid It!
Payday loan is a small, short-term, high interest rate loan. It also known as cash advance loan, check advance loan, post-dated check loan, ...

What Is Accelerated Debt Consolidation?
Are you burdened with debts? Are you finding it harder each month to meet the minimum payments for your debts? Your debts are piling up every month, creditors' calls make your feel very ...

What Is A Lien On A Property?
When you use your home as the collateral to get a loan, your lender will have a lien on your property. What does this mean and what are ...

Consolidate Debt With Home Equity as Security
In these days, hard to find a person with zero debt and most people have more than one debt. You may have high interest credit card debts, loans and mortgages. If every month you ...

  
  Recent Articles
Bad Debt Personal Loan low cost finance without debt worries
by Alan Jordan

Three Ways To Harness Your Emotions To Raise Your Credit Score
by Dulce Azogue

Explore Ultimate Destinations with UK Holiday Cash Loans
by Aldrich Chappel

Ebay and State Unclaimed Property
by Nicole Anderson

Becoming Financially Literate
by Bernard Ng

How You Can Pay Yourself First
by Bernard Ng

Easy Automobile Refinance reduce cost of owning a car
by Kevin Clark

Unclaimed Money, $30 Billion and Growing
by Nicole Anderson

What is Unclaimed Inheritance? Am I owed Any?
by Nicole Anderson

Financial Responsibility
by Alwyn Beikoff

Personal Secured Loan UK Source Low Cost Easy Finance
by Aldrich Chappel

Free Online Stock Trading Information Makes Trading Even More Profitable
by David Jenyns