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Posted almost 12 years ago

A Great Way to Pay Off Debt: Reverse the Snowball

You look at the pile of bills that need to be paid that are piled up on your desk. How did you get so far into debt? If you’re like most people, the debt didn’t occur overnight. It piled up slowly, snowballing into a big mess of credit card charges, late fees, and loans. It’s overwhelming. And if you're planning to buy a home, you need to get your debt under control.

But there is a way to reverse the snowball. It’s called the Debt Snowball Method. And it’s a strategy that will help you pay off your debt in the most efficient way possible. It also has a psychological component that gives you positive reinforcement as you pay things off so that you will keep up the momentum and become debt-free.

There are two versions of the debt snowball plan. One is to pay off debts with the smallest balances first. The other is to pay off the debts with the highest interest rates first. Take a look at the two methods and see which one works the best for you.

First, in the balance-based method, gather up all your bills and make a list of everything you owe – credit card bills, loans, lines of credit, etc., then put the list in order from the smallest balance to the largest. Most experts advise that if you have bought a home, you should exclude your mortgage from the list. Set up your budget to pay the minimum payment on every debt. If you have extra money in your budget, you can pay extra on the smallest debt, but only on that one.

With your debt payment schedule set this way, you will see your smallest debt paid off first. Since you already have that minimum payment budgeted and are used to writing that check every month, take what you were paying on debt #1 and apply it to the next one on the list along with its minimum. When debt #2 is paid off, do the same for debt #3 and so forth down the list.

Just like a snowball, your payments to the larger debts will grow as you work your way down the list. This can be a great motivator since you have the satisfaction of getting rid of smaller debts completely and working toward paying off the larger ones at a faster rate than you previously had been able to afford. Before you know it, you will be out of debt and on your way to buy a home.

The other way to use the snowball debt plan is to pay your debts off in order of interest rate, listing the bills with the highest interest rate at the top of the list and working down from there.

Whichever method you choose, make the commitment to follow it until at least the first debt is paid off. By that time, you should start to see progress and will most likely be encouraged to keep it up until you are debt free. Then as you regroup to buy a home, keep your budget in mind and stay debt-free as much as possible.


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