Once The Smallest Debt Is Paid Off, The Power Of The Snowball Effect Will Become Clear

Category: Finance, Credit.

Personal debt levels are at record highs thanks to years of cheap and easy access to credit.

For most people, debts are a, however burden which cause stress and worry without seriously risking insolvency or foreclosure. For some people, debts can get out of control and become a real problem, threatening their financial futures and even leading to bankruptcy. If you re one of these people, you ve probably already tried various schemes to try and reduce your debts, from consolidation to improved budgeting, but you might not have heard about a simple yet powerful technique for eliminating your debt: the debt snowball. So how does the snowball work? This debt repayment strategy is only suitable for people who can meet their minimum repayments plus a little extra, so if you re struggling to make ends meet you re probably better off pursuing a more aggressive strategy such as consolidation or debt management. The first step is to sort out your debts in order of size, starting with the smallest and ending with the largest.

Although it s generally good advice to make more than the minimum repayment on debts, this isn t necessary with the snowball method: you need to concentrate all your efforts on a single debt while just treading water with the others. Work out a budget that will let you make the minimum repayment on all of them. Once you ve worked out your budget, you need to somehow find a way to pay a fixed extra amount off your smallest debt every month. Keep repaying this slightly higher amount until the smallest debt is completely cleared- how long this takes will obviously depend on the size of the debt and how much extra you ve allocated to its repayment. It doesn t have to be a large amount, just enough to set the snowball in motion. Once the smallest debt is paid off, the power of the snowball effect will become clear. Repeat this process, moving up the chain of your debts, until even the largest debt has been cleared.

You now need to allocate the entire monthly payment you ve been making on the cleared debt, and direct it towards the next smallest- adding it on top of the minimum repayment you ve already been making. So what makes this method so effective? This helps to keep you focussed on the task in hand, in contrast to the sense of helplessness that indebtedness can so easily bring. As well as the obvious effect of increasing your repayment amounts on each debt in turn over time without actually using more money, you also get the powerful psychological boosts associated with clearing a debt. The key thing to remember is that at no time should your resolve to clear your debts slip, and you should never be tempted to siphon off some of the snowball amount you ve built up over time- it s only by building up the repayment amount on each debt in turn that you overcome the effects of interest charges, leading to a debt free future faster than otherwise possible.

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