Consumer debt is currently a widespread epidemic throughout the world. A recent survey reveals that 43% of the Americans spend more than they earn each year. Bankruptcy rates are rising, underemployment/unemployment are a common thing these days but the cost of living continues to increase. Consequently, more and more people are getting entangled in an intricate maze of debt. However, if you are armed with a smart strategy and firm determination then a debt free life may not be just an elusive dream.
There are several debt reduction processes as well as programs available for people who are facing financial crisis. People with manageable debt usually avoid debt relief programs like debt consolidation and settlement and focus on popular debt elimination processes like Debt snowball. Dave Ramsey’s debt snowball has gained considerable recognition among the financial experts and people seem to have a taste for it. Does that mean it is the choice for you? You never know till you take a closer look. So let’s dig deeper.
A basic understanding of debt snowball
To pay off your debt faster and more efficiently, Dave Ramsey suggests that you should try to clear your loans one at a time. Your primary task is to make a list of all your debts starting from the smallest to the largest. Pay the minimum amounts on all your debts but concentrate on clearing the smallest debt first. Once you have paid off the first debt, concentrate on the next smallest debt. Now you have a loan less; so use the extra money towards the next debt. Continue the process until all your debts are paid in full. Since the money you can throw towards your debts gets bigger or snowballs gradually, the process is called debt snowball.
Arguments for debt snowball
This process would sufficiently motivate you to carry on with your quest for a debt free life. The smaller debts can be paid off easily and this gives you the necessary encouragement. You are bound to have a feeling that you are moving in the right direction. This is very important because if you don’t stick to the process till the end then your game is ruined.
Debt snowball is a rather simple process free from mathematical complications like calculation of interest rate. If you are someone who hates juggling with numbers then this should appeal to you.
Debt snowball is a relatively safe method in the sense that there is clearly a reduction in the total amount that you owe to the creditors in a single month. Here, you do away with the smaller debts easily; so the number of debts decreases in the first few months. This puts you in a better position when you face some emergency like loss of job.
Arguments against debt snowball
Critics of debt snowball point out that this is clearly not the cheapest way out of debt. Unlike debt avalanche, another debt reduction process, the snowball method does not consider the interest involved. As a result you don’t try to eliminate the debt with the highest rate of interest and end up paying more in the long run.
What if you have a secured loan? What if that is your biggest loan as well? Can you afford to pay it at last following the snowball method? Possibly not. The dark shadows of foreclosure will hang around you and eventually you would land up in trouble. So the effectiveness of debt snowball in case of secured debt is rather questionable.
Debt snowball will provide you tangible results which would be suitable for people who need encouragement. However, if you are a patient man with an analytical bend of mind and have certain degree of discipline then debt avalanche or the higher-interest-first method would benefit you more.
Dave Ramsey’s baby is indeed an effective way to eliminate your debt but it is not without cons. So remember what you have read and then carefully decide if debt snowball is the answer to your monetary troubles.
I am a true believer in the debt snowball process. Not because it is mathamatically the best plan, but because it is the simplest.
Focusing on the smallest and using it as a stepping stone helps focus. Without the momentum building of small victories, the war will be extremely hard to win. Does the few hunderd dollars saved using the high interest first option really matter in the debt scheme. NO, because you are in it for the long haul and the victories gained by paying off the smalls debts far exceed the savings.
I love to see other people’s though process and that why you are reading this today. I have noticed one thing throughout my debt repayment process. Those who use math to get out of debt have never been in debt. If math was the key to blasting away debt, then we would never be in debt in the first place.