The Dave Ramsey’s Debt Snowball Method is very effective in eliminating debt. It has a strategy to pay the smaller accounts first and then the large ones. The debt snowball method can be used to pay off credit card credits. Now, this method is being taught by most of the experts since it is very effective.
How The Debt Snowfall Method Works:
This method is only effective if you have a zero based budget. This is because you will have an idea of your expenses and payments easily. In this way, you will be able to pay off debt quickly and effectively.
- List down all your debts.
- Do not include mortgage in it.
- List the balances from lowest to highest order.
- Consider the interest rate only when you have two same balances, putting the highest interest rate first.
- Write down the balance and the minimum payments.
- Make the minimum payment except for the smallest balance.
- Pay off the lowest balance first.
- Then direct the fund on that balance to the next balance.
- Repeat the process.
- Till the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball.
The Paradox:
In the debt snowball method, the lowest balances are paid first. Simple. When you pay off large payments first, you don’t notice much change in your bills and get demotivated. By first paying the smaller payments, your bill shows fewer payments.
Advantages:
- Psychological advantage of quick wins.
- Organized method for repaying debts.
Disadvantages:
- Not the most effective method mathematically.
Make Your Own Spreadsheet:
You can create your own spreadsheet on a paper, Microsoft Excel, use a Debt Program Spreadsheet or by using a financial management software program.
Criticism:
Ramsey states that personal finance is “20 percent head knowledge and 80 percent behavior” and that people trying to reduce debt need “quick wins”. By quick wins, he means that by paying off the small debts, people become motivated with the debt reduction system. Most of the people prefer paying off debts that have high interest rates so that they feel less burdened. This will help them make their costs debt-free than with the small balance payments.
