Wednesday, November 19, 2008

Debt Snowball

The Debt Snowball method as described by Wikipedia “is a form of debt management that is most often applied to repaying revolving credit — such as credit cards.” I myself am using it to pay off my Discover card. By most standards I did not have a lot of credit card debt, compared to what I have read online and in Dave Ramsey’s book “The Total Money Makeover”. The way I see it though any debt besides your house is bad debt. It can block your path to financial freedom. As for me I want to pay this off debt as aggressively as possible and put my money to work in other ways, such as buying land or investing in the stock market, once it recovers.

How does it work?

Let’s take a look at what makes the debt snowball method work. First off with the Dave Ramsey method, you list all of your debts in order from smallest to largest (excluding your house). And you pay off each debt in order; once one debt is paid you apply that money to the next debt and so on, until they are all paid off. It’s a really simple plan if you think about it, but no one does. If we did then there would be much less debt in the world and we might not be in some of the mess we are in today with our Financial System collapse.

Another way to look at the debt snowball is to read what Dave Ramsey, the Godfather of the debt snowball method, as I like to call him, says about the plan. “The principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, nothing gets accomplished because all your effort is diluted.” This is a fact, for years I tried to pay off debt by putting a little here and a little there with not much to show for it. Debt is a huge problem to overcome unless you have the right tools and the desire too pay it off. A person must have the will power to pay off the debt or it will never happen. It took me a few years of reading and listening to my frugal parents to understand this.

I have read about another Debt Snowball program the Motley Fool suggests. It’s basically the same type program, except you list all your debts in order by highest interests rates and the ones with the highest interests rates you payoff first and just go down the list. I see the idea behind this program, you save money on interest to which it can be applied to the next debt. But for me I will stick with the Dave Ramsey method. His book has already taught me a lot about repaying debt and the road to financial freedom; it can be a little bumpy and tough. But, as long as you stick too it and work hard you can achieve the financial freedom we all desire.

Comments, criticism, useful knowledge?

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