Show me a debt payoff tool, please!
Paying off debt can be fairly easy if you have a large income and relatively small amount of debt. In other words, it’s a ‘no brainer’ that to pay off debt, we need to earn more than we spend. Yes – an easy concept, but not so easy to implement…
But, once we ‘get’ this and are truly living on a budget and earning more than we’re spending – what is the best way to get out of debt and pay off those stubborn bills we’ve accumulated?
What tool or method can we use to get out of debt faster, more efficient, and with less headaches?
There is a method that most personal finance jedis agree is the pinnacle of debt payoff tools. It is called the debt snowball technique, and we are going to explore it in this post.
What is the debt snowball technique?
The debt snowball technique is based on a simple concept that in order to get out of debt you need to not only continue making those debt payments, but you need to stay psychologically motivated. It also contains a foundational principle to pay off your debts faster and faster as you go (think snowball). This is all inherent in the technique and doesn’t involve increasing your payments, but does involve seeing your debt decrease faster, albeit psychologically faster. Let me explain…
The first step of the debt snowball is to line up all your outstanding liabilities from largest to smallest. During this step it is important to ignore your interest rates (unless your using the snowball plus, which I’ll explain later) – as you are only interested in total amounts.
The second step is to make minimum payments on all your bills except for your smallest balance. All your extra money should go to the smallest balance in the attempt to pay this balance off as fast as possible. This is the goal – pay off your smallest balance first and fast!
This is where the snowball kicks in!
After your smallest balance debt liability is paid off, you will then focus on your next smallest balance. You will continue to make minimum payments to your other balances, but now you can send not only the minimum payment to your ‘next smallest balance’, but you can also send everything you sent to the smallest balance you just paid off. You will then continue to do this technique as you move through your balances, each time being able to send more to the ‘next smallest balance’, until all your debts are paid off! Ah Ha – Debt Snowball!!
Yes, what this does is create a debt payoff snowball technique that psychologically accelerates your debt payoff. As you see your debt decrease faster and faster by paying off separate bills faster and faster, you will feel in control and excited about paying off your debt. It absolutely works and will keep you motivated!
Ok, so what is the debt snowball plus?
The debt snowball plus is very similar to the debt snowball, only that at the beginning you take your current debt interest rate into consideration as well. When you conduct your first step of lining up your outstanding liabilities, you will add an additional step of debt consolidation to lower the interest rates on your outstanding balances.
What this means is you’ll attempt to lower the interest rate on all your balances and if possible combine your balances into the lowest number of balances possible. For example – If you are carrying debt on 3 credit cards at 19% interest and have the ability to roll this debt into 2 credit cards @ 0% interest for a year, you should strongly consider doing this before starting the snowball technique.
I say ‘consider’, because it will depend on the size of your debt, the amount you can consolidate, the new interest rate and the loan consolidation (or rollover) fee. (Beware, read the fine print!!) I fully recommend the snowball plus, but you want to make sure you are actually saving money in the consolidation – this is key. Look for small consolidation (rollover) fees with very low interest rates.
When you find the debt consolidation that works for you, two benefits come from this approach of using the snowball plus.
First, you will lower your outstanding liabilities because you will not be paying near as much interest on your bills while implementing your debt payoff plan – Yahoo! Second, it will help you psychologically as you’re paying down debt. Because you will be accumulating very little interest – or even better, zero interest – you will be turbocharged psychologically as you see your debt decrease even faster.
Well, there you have it. I love the debt snowball and even more so the debt snowball plus. It has been instrumental in my own debt payoff plans and really works.
Go ahead, give it a try and let me know how it works for you.
Ask the Readers:
What debt payoff plan have you used in the past? What is your favorite and why?