This is a guest post by David Brown, a content writer with Oak view law group. He writes on a variety of finance related topics with a strong focus on debt.
Are you submerged in debt and desperately looking for a way out of the debtors prison? Well, it is certainly possible for you to get out of the red zone without filing bankruptcy or consolidating your debt. The modern era we live in offers far too many strategies to combat debt. One of the better known approaches to eliminate debt is debt snowball. Can this approach really lead you to a debt free destination? Let’s discuss.
What is debt snowball?
The concept of debt snowball has been popularized by financial guru Dave Ramsey. Debt snowball is a process by which you list all your debts from lowest to highest and attack the lowest debt first. You need to pay minimums on each bill except for the lowest one. Pay as much as you can towards the lowest debt so that you can get rid of it as soon as possible. Next, you move on to the second lowest debt and the process continues till you are free from the rib crushing, spine tingling clutches of debt.
What are the advantages of debt snowball?
“Personal finance”, Dave Ramsey correctly points out, “is 20% head knowledge and 80% behavior”. Debt snowfall is based on this view. It rightly assumes that paying off smaller debts gives a sense of victory which motivates people to pay off all other debts.
It is relatively easy to pay off bigger debts using debt snowball method. Here you clear the smaller debts first. So by the time you reach the bigger debts, the extra amount that you can pay towards them increases. Consequently, it is possible to eliminate them quicker.
Another advantage of debt snowball method is the reduction of the total amount owed to creditors in a single month. This can save your neck in case you encounter an unforeseen situation like loss of job or medical emergency.
Debt snowball has often been compared with debt avalanche theory by which you try to eliminate the debt with the highest rate of interest first. This approach is mathematically better than debt snowball as you have to pay the least amount of interest. Nonetheless, the debt with highest interest rate can also be the one with the highest balance. This means it will take a long time to pay it off which can have a psychological impact on you. It is highly possible that you will try to get rid of it for several months only to give up because of a feeling that you are getting nowhere. This is where debt snowball scores over debt avalanche. The “quick wins” you get with the former, gives you hope-something very important, sometimes more important than money.
Some criticisms against debt snowball
It has been pointed out that by emphasizing on human psychology, debt snowball puts mind over matter which can result in monetary loss. As you focus on the debt with smallest balance instead of the one with highest interest rate, you have to pay more money in the long run. Thus, your “motivation” comes at the cost of some extra bucks.
Secondly, debt snowball does not take into account the difference between secured and unsecured debt. Problems often follow if secured debts are not addressed at an initial stage- foreclosures and repossessions being at the worst end of the spectrum.
Is debt snowball the right choice for you?
Debt snowball is a simple debt reduction method which is suitable for people who have a wide range of balances. It gives you tangible results and motivation which is missing from other similar approaches. While is it most effective for people who need some encouragement in the form of quick results, individuals with a lot of patience will benefit more with avalanche approach because it is cheaper.
Debt snowball can certainly help you to climb up from the trenches. However, you should remember that it cannot make you debt free with the wave of a wand. But if you stick to it till the end then your patience will be certainly rewarded.