Debt Snowball Methodology – Pros and Cons
November 12th, 2007By: Stephen Bishop Jr.
It is safe to say that not everyone has heard of the debt snowball method. In short, it is a debt repayment method for credit cards and other various forms of debt. I hope to explain it in the simplest way possible, and also point out both its advantages and disadvantages.
Okay. Make a simple list of your debts including the minimum payment. Here’s my sample list.
1. Auto Loan - $4000 Balance, $250 Minimum Payment/Month
2. Credit Card B - $200 Balance, $25 Minimum Payment/Month
3. Credit Card A - $500 Balance, $35 Minimum Payment/Month
4. Loan - $5000 Balance, $300 Minimum Payment/Month
Now that you have made your list it is time to put it in order from smallest balance to the highest balance, without considering interest. Here’s my NEW ascending sample list of debts.
1. Credit Card B - $200 Balance, $25 Minimum Payment/Month
2. Credit Card A - $500 Balance, $35 Minimum Payment/Month
3. Auto Loan - $4000 Balance, $250 Minimum Payment/Month
4. Loan - $5000 Balance, $300 Minimum Payment/Month
It is now time to figure out how much extra money you have at the end of the month to add to your minimum payments. For my example, I will have $75 extra per month to add. So, here is how the snowball method works. Start with the smallest balance you have. This will be number 1 on the list which is Credit Card B. Add your extra $75 to the minimum payment of Credit Card B. So, $75 plus $25 is $100. $100 is the amount that you will pay. Continue to make this $100 payment each month on Credit Card B until it is totally paid off. Do not forget! Your minimum payments continue on your other debts during the debt snowball method.
Now that Credit Card B is totally paid off, let’s move on to the next debt on the list which is Credit Card A. Add your $75 to the minimum payment of Credit Card A. This should total $110 ($75 plus $35). Now add the minimum payment that you were paying on your “Number 1” debt to this as well. So, $110 plus $25. This totals $135. This will be the amount that you pay each month towards Credit Card A until it is paid off completely. The process continues. After each debt becomes paid off you move on to next. Continue to add the minimum payments from the paid debts as well as the extra money ($75) to your new targeted debt.
Disadvantages:
The debt snowball repayment system is obviously one way out of many to become debt free. Many argue that it is far from the best idea.
The debt snowball method does not focus on your interest rates. A person targeting their debt s with higher interest rates has the chance of getting out of debt much quicker. Also, the debt snowball method will not work as well with people that have numerous debts and those with much higher debts. In the example I only listed four debts to be repaid, and the debts were not too high. What if you had nine debts to list with a couple of them in the $10,000 range? Yes you could do the debt snowball method in this situation. However, the long amount of time it would take for you to get to the large debts would allow it to grow substantially. Not to mention, before you get to it, you are only making the minimum payments on these large debts.
The debt snowball method requires that you do not contribute to retirement during the process. I see this as a disadvantage. Contributing to retirement continually and at a rate you can afford can take advantage of compounding interest and pay off down the road.
Advantages:
Many supporters of the debt snowball method believe it to be the best way to become debt-free. As each single debt becomes paid off, the debtor sees less bills coming to the house. The feeling of having fewer bills to pay eases their mind. In the end, the debt snowball method focuses more on psychological momentum than anything else.
December 10th, 2007 at 8:28 am
Before You Can Really Start Setting Financial Goals, You Need to Determine Where You Stand Financially. Financial Information remains the most ignored yet the most important information in one’s life. I will be happy to see everyone comfortably enjoying all financial services like loans, online buying and so on without doubt or fear of loosing money especially when looking for financial matters online. Yet still loan consolidation is still not a familiar topic to talk to someone about while it is one of the best way of managing your loans.
January 15th, 2008 at 4:27 am
Great information about the taxes! The ratio clearly distinguishes the percentile of amount being paid by the people of a particular state. Moreover, I got to know that there are nine states where income tax is not obligatory. Its really surprising!
January 15th, 2008 at 4:28 am
I heard about this system just a month ago from my friend. However, your info has cleared all my doubts. And though it has some disadvantages, I think that this can be one of the best ways to become debt free.