The Debt Snowball - Getting out of Debt Faster!

You may have heard of it.   The debt snowball.  NO it is not the snowball of debt you build up when you have to pay a ton of interest to the bank, credit card or finance company.

The debt snowball is the method that you can get your debt under control and begin to have your money work for you and not the person you are paying.
It is basic in theory and maybe hard to implement.  Especially if you have come to rely on credit cards.  For this to work properly you really need to get to the point that you are paying for things in cash, and saving up for purchases using a sink fund (see my post on the topic - Pay Yourself First Some Thoughts on Finances ).  You'll see how using this method in conjunction with the snowball method will not just save you money but, make you money!

The steps to the debt snowball debt - crazyrunninggirl.com

 The snowball method basically require you to determine all your debts - student loans, credit cards, mortgage, car loan, etc.
You then take these debts and order them by the balance amount.  The amounts should be smallest to largest.  Then you do everything you can to pay off the smallest amount first.  All other debt you only pay the minimum.   What happens here is that you get to the point of consolidation.  You'll end up having less debt fairly quickly especially if you have several smaller balances.




Think if you try and pay off that credit card with just a little extra every month, say $5 thinking your doing some good.  Now if you have 3 cards with a balance and an auto loan and house payment and a smallish student loan.  That would amount to say $30 extra every month.  Now that helps a bit but not much.  If that $30 is combined and applied to one balance only it will be more helpful and get better results sooner.  How as you get rid of a balance you also get rid of the interest on that balance.  That savings together with the small combined amount of extra can then be applied to the next and the results begin to grow with time.  This is why it is called a snowball.


There is an alternate method where you pick which debt to start with by the interest rate.  That might be a credit card.... not like the mortgage or  student loan.  This can work also and due to this is called an avalanche.  See the comparison in the chart below.

Basically you get quick results with the snowball method compared to the avalanche.  This can help to keep someone motivated especially if they have a lot of debt.  it can help also since you have fewer balances out there and seem to be making head way.  Which is best?  You'll have to decide.  Dave Ramsey recommends the snowball.




I think that would also be the best.  With fewer balances you are doing less juggling and will soon regain your sanity.  You might feel tempted to do a consolidation loan.  He mentions that it is just kicking the can down the road.  You have to remove your debt sources as well if this is to work in any form.   That means cutting the credit cards etc.

Either way concentration on removing debt with all you can muster is far better then throwing a little extra at each one of your balances.......


Buiadh - NO - Bas

---

Total Money Make Over and 3rd World Countries

I've been reading the book The The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness by Dave Ramsey recently.  It sure has been an eye opener in a variety of areas.
I did suspect many of the "myths" but, then I got to thinking.




I came up with an idea that  IMF acting like a credit card or line of credit to 3rd world countries is hampering their ability to build wealth.

As Dave puts it... as long as you are owing money to someone else, living beyond your means, doing the "90 days same as cash" etc you'll never get ahead.   You see he proffers and I think he is right..... if you carry a balance... just a little over every month you will eventually be owing a chunk of interest... that interest is no going to your pocket but, theirs.  Thus slowly you erode your opportunity for wealth.

So if the 3rd world countries would pay as they go..... kept to their budget they'd build wealth.  So instead of getting money from the IMF (in our case it would be the local lending institute) it actually saved up for projects it would come out ahead.   Think if they are borrowing 25 billion  at 5% for some dam project.  You might think the amount is small and the interest spread out over 30 years would be low.  However, they could save the interest payments if they took just a couple of years to save up the 25 billion.  In most cases the total amount of payments will be about double the amount borrowed.  So depending a little up front sacrifice will bring long term advantages.
For this example on this 25 billion dollar loan there would be payments of about 1.34 billion monthly over the 30 years.  So in reality they would need to wait about 2 or 3 years and would have the total they need for the project.  Granted the payments are based on the fact they have a certain amount of upfront money in say the neighborhood of 5 billion.  so they likely need about 30 billion total for the project.  So three years would do it to save if the 1.34 billion payment amount were used.




Think of that 3 years of waiting to basically save 20-30 billion.  They would by waiting have two projects in less time then it would have been to pay off the first one by taking the loan.

I discussed the concept of a stink fund in a prior post - Pay Yourself First - some thoughts on personal finance

If countries would us this method they could have some real GDP growth, as they potentially would have double the money in the long haul.

So there is my 2¢ worth of thoughts.
Applying the total money makeover could do wonders not only for average household in the USA, but, those in other countries and for the governments of those countries.




Buaidh - NO - Bas