Debt Management Guest Post

Is Debt Snowball An Effective Debt Reduction Strategy

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.

Friday Night Likes

Friday Night Likes 6/18/10

Lights Well….it’s another Friday and all I can say is TGIF. I’m not really having a good week. My allergies are killing me and I got pinkeye…great. But anyways, plenty of time to heal over the weekend. If you haven’t yet be sure to sign up for weekly updates and email contests I’ll be doing soon. Also check out my Facebook page and be sure to Like it:) Now on to the Likes:

@MoneyHighway 5 Things Putting Your Retirement at Risk

These are things you really need to look into now so you can minimize these risks. I really like #2 because it will help you reduce your dependence on the stock market.

@BudgetsAreSexy Talking About Money Before Marriage (DO IT!!!)

I believe that talking about money with your partner is really important to the success of the relationship. This post backs up my feelings.

@MoneyCrashers What’s The Best Way To Get Out Of Debt?

This post goes over a couple of the popular ways to get rid of debt and lets you know the best way. Pretty good read.

@Trenttsd Saying “I Will Do It In The Future” Is an Excuse for Failure

Live in the NOW means do it NOW and stop putting it off

@FCN Financial Guide for the Unemployed

This is a great post that goes over the different things you should do if you become unemployed. It’s a checklist I’m going to be keeping around incase it happens to me.

@Wisebread Adjusting Financial Attitudes: Lessons for Parents and their Children

I really like this post. It goes over how disciplining kids (ex. chores) and money management are linked. Very interesting read for those with children or soon to have children.

And go check me out in the Carnival of Personal Finance this week.

Yakezie Thursday

Yakezie Thursday 6/17/10

YakezieI just broke the 400,000 mark, yayyyy. But anyways, I’m a long way from my new goal of 300,000. Thanks you for helping me out. I really do appreciate you reading my blog. If you haven’t yet be sure to download the Alexa toolbar and help me get up in rank…please:) and leave a review if you like my site.

Be sure to Like my Facebook page. You can sign up for weekly updates and exclusive email contests I’m going to be having on the right hand side ——> or here.

There’s a lot of great Yakezie posts this week so check them out:

@GrlRedBalloon In the Red: Forget retirement, grandpa

This is a very sad story about Red’s grandparents and debt. I just said “wow” after reading it. That’s all I really have to say. Go read it and you’ll see what I mean.

@ Car Negotiation Coach Assigned Reading-The Secrets of Power Negotiating

In about a year I plan on getting another vehicle. This post goes a little bit into the book “The Secrets of Power Negotiating”. I’m going to add it to my reading list and hopefully it will help me out in my negotiating skills.

@DividendMonk Investing Thesis

This is a great post that I plan to follow when I get into investing. It has great ideas about what to ask yourself before you decide to invest in a company.

@FinancialSamura Being Overly Content Can Be Detrimental To Your Career

Sam wrote a great post about loyalty and being content with your employer. People are a creature of habit, so staying in your job for to long could make it harder for you to leave for a better opportunity. That’s not really a good thing. Especially, as Sam points out, when your employer could let you go on a whim, no matter how long you’ve been there.

@CanadianFinance How Small Savings Can Make A Big Difference

Tom does a great job of showing, through his real life situation, how you can save on monthly expenses and how it can add up.

@prairieecothrif I’m A Loser! Are You?

Miss T. goes over why the people in “The Biggest Loser” are successful. These different things can be used in all sorts of life situations.

@MoneyCrush The One Skill Anyone Can Learn to Make (and Save) More Money

I’m not going to tell you the skill because I want you to click over and read it. I can say that the post delivers on what the title promises.

@danielpacker Saving Money on Car Insurance is Easy!

I’ve been with the same car insurance for several years. I should really start to look around and see if anywhere else is cheaper. I’ll be using these tips to help me get a lower rate.

@flexo Pet Ownership: A Financial and Emotional Responsibility

I’m a fan of owning pets, but I do agree that if it comes down to just being able to support myself or my pet, I will always choose me. Flexo gives a great argument as to why you shouldn’t keep a pet if all you can afford is love.

Announcements

New Goal

I reached my goal for the Alexa ranking of 450,000. I didn’t really know what was possible or how fast I would move up, so I believe I low balled my goal. I do know that it does get slower the higher up you go in rank. My new goal is 300,000 by July 4th. I believe this is possible with all of your help. Please download the Alexa toolbar and keep reading. Thank you so much to all of you. Oh yea, be sure to sign up for my newsletter/email contest on the right sidebar. Also, please Like me on Facebook by clicking the Like button on the left sidebar. :)

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Friday Night Likes

Friday Night Likes 6/11/10

I’d like to say thank you to every one of you for visiting my site. Be sure to keep coming back for more. Make sure you sign up for my newsletter on the right side to receive great tips. Every now and then I’ll be holding contests exclusive to my newsletter subscribers, so be sure to sign up. If you have an RSS reader, go ahead and subscribe to get all of my new posts sent to you. As always I’m available on twitter @FinanciallyPoor or on Facebook.

I’d like to take this time to tell you about a petition being signed to make Nov. 19th, National Entrepreneur’s Day. If you are on twitter or Facebook be sure to check it out and sign it.

Now on to the likes.

@ Little House in the Valley Who are the Real “Joneses?”

This post goes over the book The Millionaire Next Door a little bit and gives the history of where “The Joneses” came from.

@KevinDuffey Generation Lazy

I agree with the position in this post for the most part, in that we feel more entitled than other generations. However, not everyone goes through the situation described in the post. I never had everything handed to me (although I would have liked it to have been) and I never finished college. I’m definitely not in a great situation but I plan to work hard and change where I am in life. And the point he was getting at, is that you have to work hard and can’t have everything handed to you.

@ The Amateur Financier Can Money Really Not Buy Happiness?

This post answers that question really well. I agree that money can buy things that make us happy and it can also relieve a lot of stress, which can also make us happy.

@MoneyHighway Are you ready to buy a home?

There are some great questions on this post that you should ask yourself before purchasing a home. I can tell I’m not ready for a house yet. Hopefully in a few more years I’ll be in more of a position to purchase one.

@JonButterworth Idea Factory – Strategy For Thinking Creatively

I tend to stay up late in bed thinking about new ideas to blog about and it’s not really the best time to do that. In this post Jon goes over his plan to make a time to be creative. I’m going to slightly modify it from making business ideas to making post ideas, but I think it’s going to help me focus my creative thinking.

@Zen_Habits The Absolute Beginner’s Guide To Starting A Small Online Business

I’m a fan of entrepreneurism. I think everyone should own their own business. This post is from a minimalist site so you can be sure it’s going to get to the bare essentials of creating a business. It is short and to the point, just the way I like it

To get you ready for the weekend, check out this funny video: