Reducing Debt Using the Snowball Method

by William Blake

There are multiple ways to reduce your total (and monthly) debt load, some less painful than others.

The obvious one, of course, is to simply pay down your debts. That can be difficult, and for some it may seem hopeless. But there is one method that has been employed by many with great success: the snowball method (so named by Dave Ramsey).

This method is in no way technical. Simply organize your debt from least to greatest. You pay only the minimum payment on every debt with the exception of the lowest debt. Any excess income should be put toward the lowest debt which will enable you to eliminate that debt first. Once eliminated, the minimum payment that once was allocated to your lowest debt can be applied to the next debt in line for payoff. You continue in the same manner until you have decreased your debt to the desired level.

This method has several advantages. You see regular, visible progress in reducing your debts and in a relatively short period of time you could well be down to a livable level. As you roll-off those debts, you have more free income which can be split between payments on the debt next in line and the enjoyment of some rewards.

Psychologically, this helps keep the debtor motivated to continue the program. Seeing real progress helps one stick with it during a financially challenging period.

But, for all its virtues, the method does have one real drawback. It actually requires more time (and money) overall to pay off all your debts that way. The reasons have to do with how interest compounds.

Compounding interest causes your higher debts to increase at a faster rate. That means that even if your lowest debt and your highest debt have the same interest rate, by leaving an outstanding balance on the highest debt for a longer period of time you will pay more interest than if the lowest debt was left outstanding. This means your overall repayment of interest will be higher.

The way to overcome this flaw is to work your list in the opposite direction paying the highest debt first. By paying down the higher balances you reduce the interest that will compound on these and, as a result, the amount of overall interest you will pay.

The problem with working the snowball method in reserve is that this way offers very little incentive to stick with it. The visible results come much slower and it takes a lot of self control to stick it out while trying to pay down those large balances.

At most interest rates, the lower debts will actually get paid off first. But in the meantime you are making high monthly payments. That takes a lot of willpower every month.

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