Handling the Debt Snowball
A.K.A. How not to pay off your debts.
It seems like this debt strategy is constantly in the news. Popularized by Dave Ramsey, the debt snowball is supposed to be the latest and greatest way to repay your debt. While it may help with the psychological aspects of tackling a large debt load, it will actually cost you more over time.
The Debt Snowball
The debt snowball is a technique where you start paying off the debt with the lowest balance. For example, imagine you have three debts that are for $1,000, $2,000 and $5,000. In this strategy, your extra money would go to pay off the $1,000 debt first, then the $2,000 debt and finally the $5,000 debt.
If all your debts have the same interest rate, this debt strategy works great. The problem is that most of your …show more content…
Those interest payments will cost you significantly in the long run—sometimes, as much as two or three times the actual debt. If you are only paying off the smaller debts, you could be missing out on a huge cost savings over time.
There is some research that shows that people who tackle the smallest debt first are more likely to escape from their debts entirely. Created by noted institutions like Harvard University, these studies show the significance of psychological motivation in how we manage money. If you need that motivation, go for it. Doctors always say that the best exercise is the one that you actually do. When it comes to paying off your debts, the best technique is the one that you will actually do. While you should ideally be focused on paying the least amount of money, your biggest goal is to just reduce your debt level. If you have to do the debt snowball to reach this goal, then do it. If you want to save money and have the motivation to just pay on the highest interest rates first, then go with that
A.K.A. How not to pay off your debts.
It seems like this debt strategy is constantly in the news. Popularized by Dave Ramsey, the debt snowball is supposed to be the latest and greatest way to repay your debt. While it may help with the psychological aspects of tackling a large debt load, it will actually cost you more over time.
The Debt Snowball
The debt snowball is a technique where you start paying off the debt with the lowest balance. For example, imagine you have three debts that are for $1,000, $2,000 and $5,000. In this strategy, your extra money would go to pay off the $1,000 debt first, then the $2,000 debt and finally the $5,000 debt.
If all your debts have the same interest rate, this debt strategy works great. The problem is that most of your …show more content…
Those interest payments will cost you significantly in the long run—sometimes, as much as two or three times the actual debt. If you are only paying off the smaller debts, you could be missing out on a huge cost savings over time.
There is some research that shows that people who tackle the smallest debt first are more likely to escape from their debts entirely. Created by noted institutions like Harvard University, these studies show the significance of psychological motivation in how we manage money. If you need that motivation, go for it. Doctors always say that the best exercise is the one that you actually do. When it comes to paying off your debts, the best technique is the one that you will actually do. While you should ideally be focused on paying the least amount of money, your biggest goal is to just reduce your debt level. If you have to do the debt snowball to reach this goal, then do it. If you want to save money and have the motivation to just pay on the highest interest rates first, then go with that