Snowball Debt Reduction
|
Since debt seems to snowball, using snowball debt reduction seems appropriate. The snowball method refers to applying payment toward revolving credit like credit cards. Experts differ on whether the snowball method is the best financial method for repaying debt or not. Experts also would disagree in whether debt management techniques would involve the snowball method. Before considering any form of debit management, a person should talk to their creditors to see if reduction in current balances is possible. Sometimes negotiating with creditors can lower debts, especially credit cards, around 50% or more. Most creditors would rather negotiate down than lose the entire payment if an individual should claim bankruptcy.
Talking ones way out of debt is impossible although some have been able to do so. An individual needs to figure out the best solution for his or her situation. To determine whether the snowball debt reduction is the best method for a household, a person must know how he or she handles issues that take time to complete. Most people need to see results and objectives met along the way. If measures of completion for a task are not necessary, this method of account reconciliation is possible.
Snowball debt reduction refers to a process of paying off balances and adding the previous payments to new figures. All balances should reflect, in order, the smallest at the top of the list with the largest at the bottom. The list works either on regular paper, in bookkeeping ledgers, or in a spreadsheet. For those technically challenged or can barely keep the checkbook balanced, simply writing the amounts on a sheet of paper is sufficient. For people who prefer systematic and electronically controlled information, a spreadsheet works perfectly. The spreadsheet will help a person track progress with minimal effort once the data enters the spreadsheet. The key to the snowball debt reduction is writing the accounts from the smallest amount at the top to the largest on the bottom.
Before snowball debt reduction can occur, a person should develop a budget. First, a log of expenses must occur. In a months time, all expenses from a candy bar to gasoline and a mortgage payment need to go on the expenses list. Second, a look at the list should help an individual know what is necessary what is excess so that more money is applied toward paying down the balances. Thirdly, once a plan formulates and a budget appears, an individual needs to stick to the proposed plan. If extra spending occurs, the revolving credit will never dwindle. He or she should seek extra money even if it means working a part-time job or selling some personal items.
Now, snowball debt reduction can begin. Each bills minimum amount is paid except for the smallest. The extra money found during the budgeting phase is applied to the smallest amount too. Once that statement reflects zero, the money used to pay that invoice is added to the next statement along with the minimum already paid. Once the second invoice is zero, the money applied to it from the first invoice and the minimum paid applies to the third statements minimum due. Thus, the snowball debt reduction begins. The following is an example. The bills total $150, $500, $1,000, $1,500, $1,750, and $2,000. The minimums for each in order are $20, $40, $50, $55, $70, $75. The person found 40 dollars extra to use toward paying down the bill. So, $60 can be applied toward the first amount of $150. In two and a half months, the first invoice is gone. So now $60 is applied to the $40 of the second invoice equaling $100. In 5 months, the second statement is also paid. The $100 can then be added to the $50.00 already being paid on the third bill, which brings the new payment to $150.00. In just over 6 months, the third bill is paid in full and now $205 can be applied to the fourth bill. Thus, the snowball affect occurs. Just as a snowball, rolling down a hill catches bits of snow creating a bigger ball at the bottom, so does this method of repayment. Beginning with the smallest amount and working ones way toward the larger allows a person to see light at the end of the financial debt tunnel. An individual choosing this method of repayment needs to call their creditor and ask them to apply the extra payment on the principal.
As shown, financial freedom can come by snowball debt reduction. As mentioned previously, experts would disagree with each other as to whether the snowball effect is the best way to reduce financial responsibilities. Financial advisors say that the best way to reduce balances is to pay the invoice with the highest interest rate because paying off the highest interest rate first is better economic judgment. However, a person may feel inundated and see no hope, especially if the card with the highest interest rate also has the highest balance. What is important for an individual to remember is that unforeseen circumstances arise and new cards and new accounts should not be opened. The only cards an individual should use on a regular basis would be food and gas cards. Otherwise, checks and cash are the payment of choice. Debt proofing life is hard because spending money is a necessity. Two of the most important lessons to learn are to pay more than the minimum and to rollover payment once one statement reflects zero. Another lesson to learn is to change spending habits. Then he that had received the five talents went and traded with the same, and made them other five talents. And so he that had received five talents came and brought other five talents, saying, Lord, thou deliveredst unto me five talents: behold, I have gained beside them five talents more (Matthew25:16&20).
|
|
|
|
