Snowball Method of Debt Reduction

There are multiple ways to reduce your debt.

The most obvious one, is to simply pay down your debts. That's easier said than done, isn't it?

But there is one method that has been employed by many people in debt with great success. It is known as the Snowball Method a debt reduction method taught by Dave Ramsey.

Here's how it works.

1. Order your debts from the lowest to the highest.
2. Next, pay the minimum required on all monthly debts.
3. Allocate any remaining funds you can to paying off the smallest debt. This means that the smallest debt will get paid off first. This frees up yet more money to apply to the next-smallest debt.
4. Repeat

This method has many advantages. With month that passes by, you see regular, visible progress in reducing your debts and in a relatively short period of time. As you pay off your debts, you have more free income which can be split between payments on the debt next in line.

Psychologically, this can keep you motivated to continue the program. Seeing real progress can be exciting enough to stick with it during financially challenging times.

However, there are some drawbacks to this program.

If you follow this method, you will be spending more time and money paying off all your debts. That is because by paying off the lowest amount first you are actually paying more in total interest paid. Since any outstanding amount is charged at the same rate of interest, the higher amount will incur the largest charge. As a result, over time, you will pay more in total interest charges.

In all actuality, reversing the order, paying the highest amount first, actually saves you money in the long run. As you pay down the highest debt first, you are reducing the amount of interest dollars paid over time.

But, psychologically, paying down the highest card is challenging and is harder for most people to stick with. So, if it's a matter of sticking with it, the snowball method might be effective enough to help those with financial problems get out of debt.