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Another Method to Pay Off Debt: Snowball Debt Payoff Method

For all intents and purposes, the method that I described for paying off debt in Getting Down to Business is the most financially sound method. Debts with the highest interest rates are the ones that cost the most to keep. These debts usually have the largest balances, as well. For example, you can typically get a credit card interest rate for pretty low these days, even if you do not have stellar credit. However, you could have an installment loan for a car that would probably be in the 12-18% range. The car is probably going to be the larger of the two.




For many people, the most difficult issue with getting out of debt is self-discipline. For starters, this is usually the reason why people get into debt in the first place (that, and they may not be financially astute). So, as I always say, let the people do what works. Calling someone a fool because the best method is not working for them is wrong. People tend to do this all the time. Examples of this include conservation, technology, etc. People tend to think if you are not doing everything to perfection you are somehow below them. This is not the case. It is, in fact, counterproductive. If people think that conservation is important, they should accept that few people are going to make a complete 180. Allowing these people to do something small, like switch to more efficient light bulbs, is good enough. In the same way, giving people an easier method of reducing their debt is better than nothing.


The snowball debt payoff method employs some of the ideas that I explained in the past post. For instance, you pay the minimum on all your debts except your target debt. For the target debt, you pay as much as you possibly can until it is paid off. After you have paid off the target debt, you move on to the next debt and do the same thing. The difference in the two methods, however, is drastic. In the method I described before, your target debt is always the most expensive debt. The most expensive debt is the one where the interest to tax benefits ratio is the worst. Meaning, the debt with the highest interest rate that has no tax benefits is the most expensive debt. Many times, it also carries the highest balance. If this is the case, it is even more expensive. For some people, though, they do not see much progress because they are stuck on that one debt for a considerable amount of time. With the snowball method, your target debt is always the debt with the lowest balance. For people who find it difficult to stay disciplined, or who are impatient, this works the best. You see the results more quickly because you are knocking out the small debts very quickly.


Here is an example, modeled after the one used in my past post:



  • Credit card #2 - $32/mo. - $800 @16.99%

  • Credit card #1 - $40/mo. - $1200 @ 15.99%

  • Credit card #3 - $27/mo. - $600 @14.99%

  • Car payment - $212/mo. - $10,200 total @ 11.99%

  • Student loans - $120/mo. - $15,500 @ 5.3%


In this case, Credit card #2 is the most expensive debt, but it does not have the lowest balance. So, you would arrange the debts from lowest to highest balance and pay them off in that order:



  • Credit card #3 - $27/mo. - $600 @14.99%

  • Credit card #2 - $32/mo. - $800 @16.99%

  • Credit card #1 - $40/mo. - $1200 @ 15.99%

  • Car payment - $212/mo. - $10,200 total @ 11.99%

  • Student loans - $120/mo. - $15,500 @ 5.3%


I say, if it works, that is great. One thing you could do is to use this method to get started. This will help to build your confidence. Once you knock out all of your small balances, switch to the other method and get rid of the most expensive debts. In this situation, it happens to be the same order. But, in other cases, it may be different. Always keep in mind, however, that debts such as mortgages and students loans have tax benefits associated with them. You have to weigh those benefits against the interest rate. Also, some people think having that tax benefit outweighs paying off the debt in full. This is completely untrue, although, paying off your other debts first is more prudent.


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