For Those w Goals to Pay Down Debt in 2009

Here is the research I have found on the best way to pay down debt: The Snowball Method. I gathered this information for a friend and figured I would share it here as well. Now I just need to take my own advice =).

From Wikipedia:

The basic steps in the debt snowball method are as follows:

-List all debts in ascending order from smallest balance to largest.
This is the method’s most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.

-Commit to pay the minimum payment on every debt.

-Determine how much extra can be applied towards the smallest debt.
-Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
Note that some lenders will apply extra amounts towards the next payment; in order for the method to work the lenders need to be contacted and told that extra payments are to go directly toward principal reduction.

-Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.

-Repeat until all debts are paid in full.

In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name).

The theory works as much on human psychology as it does on financial principles; by paying the smaller debts first, the individual, couple, or family sees fewer bills as more individual debts are paid off, thus giving ongoing positive feedback on their progress towards eliminating their debt.

http://www.whatsthecost.com/snowball.aspx?country=us

http://www.getrichslowly.org/blog/2006/09/28/in-praise-of-the-debt-snowball/ : A great site to keep up with.

http://www.thesimpledollar.com/2006/12/09/the-debt-snowball-concept-how-i-made-it-work-for-me/

http://zenhabits.net/2007/03/10-habits-to-develop-for-financial/

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s