Debt SnowballsPosted on September 27th, 2010 William No comments
When paying down debt, one thing that many people find helpful is a debt snowball; this is actually a central element in the popular financial management plan by Dave Ramsey.
The debt snowball is a simple concept: you make minimum payments on all of your credit cards, except for the one with the lowest balance. That card, you pay as much as possible towards each month until it's paid off. You then take the money that you were putting towards payments on that card and put it towards the card with the second lowest balance, and so on, until you have no balance remaining. Once a card is paid off, it's put away and no longer used.
From a strictly mathematical standpoint, this is silly: you pay the least by putting your money towards the card with the highest interest rate. From a psychological standpoint, however, it can be very effective as you gain a sense of accomplishment from seeing your debts disappear; the satisfaction of having fewer bills makes it easier to keep on saving, whereas putting money towards a card with a higher interest rate but also a higher balance can mean that it takes longer before you can really see the difference your actions are making. Additionally, every time you pay off a card you get to write a bigger check towards the next one!
Of course, once you've paid off all of your credit cards, since you're in the habit of saving it should be simple enough to redirect the money you were putting towards the credit cards into retirement savings or to pay off a mortgage. Then you're well on your way to financial independence!