If you’re like most Americans, you’re walking around with debt hanging around your neck. From credit cards to mortgages to student loans and car loans. Debt is ever present and can be overwhelming. Paying off debt is something that people are constantly trying to figure out how to do.
We all know how stressful debt can be. It affects our health, our relationships and peace of mind. It can also hurt our wealth building efforts.
Too much debt can destroy you credit score. (Funny, since having debt is the only way to get a credit score.) That will affect your ability to get loans. Even if you are able to get a loan, then it will affect your interest rate.
The more bad debt you have, the higher your interest rate. The higher your rate, the higher your payments. You’ll have to pay more for everything. You don’t want that, do you?
If you have bad debt racked up on consumer goods then you’re in a bad position. Consumer debt like car loans and unpaid credit card balances have to go as quickly as possible.
Time to eliminate your debt and eliminate it fast. If you’ve had problems sticking to a debt elimination program in the past then try the Snowball method.
It’s considered by many to be the best method for paying off debt. Here’s how you can do it.
List all your debts from smallest to largest
Write down every single one of your debts. All except your mortgage, if you have one, unless it’s really small.
Put them in order from the smallest to the largest. Don’t worry about the interest rate.
Then you pay the minimum payments on all your debts except the smallest one. Do NOT pay extra on anything else!
Put all the extra money that you possibly can towards the smallest debt. Pay it off as quickly as possible and then move on to the next larger debt.
For example:
Debt#1: Medical bill kes30000 (kes5000 payment)
Debt#2: Furniture loan kes100000 (kes6000 payment)
Debt#3: Credit card balance kes300000 (kes7500 payment)
Debt#4: Auto loan kes900,000 (kes30000 payment)
You would pay all your minimum payments but pay extra on the medical bill.
Do whatever possible to get as much extra as you can. Stop your savings and stop investing in your 401(k) temporarily. Get a second job temporarily. Start selling stuff that you don’t need.
If you can scrape together even a measly kes10000 a month then it would make a big difference. Even working at SGR part-time can do that. Add that $100 to that kes5000 payment and that medical bill will be gone in 2 months instead of 6.
Then add that kes15000 a month to the next largest payment, the furniture loan. That kes21000 monthly payment will pay the debt off in no time.
After that the payment will grow to kes28500 monthly to eliminate your credit card debt. It’s like a snowball that grows bigger as it rolls downhill, hence the name. You’re consistently building momentum.
The Advantages of the Snowball Method
The major advantage of the Snowball method is the excitement you feel by getting quick wins. Crossing debts off your list with a pen is satisfying.
It’s great from a psychological standpoint. Getting rid of the small debts is like getting rid of a small bug. It may not be your biggest problem but it is an annoying distraction.
Personal finance isn’t just about numbers. Otherwise it wouldn’t affect us physically.
The Debt Snowball keeps you motivated and increases the chances of you sticking to your debt elimination program.
Paying off the largest amount or the highest interest first can be depressing if it takes a long time to eliminate that first debt.
If you have a bunch of negative items on your credit report, then the Snowball is really good. The faster you pay off the small debts, the faster negative items will be removed from your credit report.
Key points to remember
The advantage of the Snowball method comes from intense focus and action. It won’t work if you only throw a couple of dollars at it when you “feel like it”.
This is about a short-term, focused attack
on debt. No dipping your toes in.
Throw as much extra money that you can generate at your debts. It’s only temporary. Am not telling you to work a second job for the rest of your life.
Get focused and get that debt paid off quickly. Get that Snowball rolling so you can get peace of mind.