NDSU Extension Service - Ramsey County

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Which Snowball For You?

Which Snowball For You?

 

          Popular New Year’s resolutions include: “get out of debt”, “manage my money better” and “save, save, save”.  When it comes to debt reduction, the classic snowball method includes: 

          1. Make a list of all your debts, ordering them from highest interest rate to lowest interest rate.

          2. Set aside a specific amount of money that will go toward paying these debts each month.

          3. From the amount you set aside, make the minimum payment on all debts. Whatever money is still left over goes toward the debt with the highest interest rate.

          4. When you finish paying off the debt with the highest interest, continue the same method. You make the minimum payment on all debts, and all of the extra money goes toward paying down the debt with the now-highest interest. The payments made toward the first debt that was paid off get “snowballed” into the next-highest-interest-rate debt.

          However, some individuals are big proponents of the lower snowball methods:

          1. Make a list of all your debts, ordering them from lowest balance to highest balance.

          2. Set aside a specific amount of money that will go toward paying these debts each month.

          3. From the amount you set aside, make the minimum payment on all debts. Whatever money is still left goes toward the debt with the (and here is the unique feature of this method) lowest balance.

          4. When you finish paying off the debt with the lowest balance, continue the same method. Make the minimum payment on all debts and then put all of the extra money toward paying down the debt with the now-lowest balance.

          The truth is, the best method depends on how you view money.

The most important thing to remember is that debt reduction should reduce your debt. While the classic snowball debt reduction method is the more rational method since it means paying the least amount in interest charges, many people don’t view money in a rational manner. They instead view money from an emotional perspective and quickly paying off the small balances keeps them motivated to reduce all their debt.

          In the end, choose the method you believe is going to work best for you. There isn’t a “right” or “wrong” answer if the method ultimately frees you from the debt you have accumulated.

 

 

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