Disclaimer: I am not a financial adviser. I am not a certified public accountant. I am not an estate planning attorney. If you need financial advice, seek an appropriate professional.
Are you working on organizing your finances? If you have debt–and most of us have at least a mortgage if not car payments and one or more student loans–a primary step is to prioritize paying it off as quickly as you can. But did you know there are multiple strategies to pay off debt?
Financial guru Dave Ramsey is known for his suggestion of a debt snowball. If you’re unfamiliar with the concept, the debt snowball is
a debt reduction strategy where you pay off debts in order of smallest to largest, gaining momentum as each balance is paid off.
That definition is directly from Dave Ramsey’s web site, which also lists the following steps to creating a debt snowball:
- List your debts from smallest to largest.
- Make minimum payments on all your debts except the smallest.
- Pay as much as possible on your smallest debt.
- Repeat until each debt is paid in full.
This debt snowball method is to give you the motivation to pay off debt; the thought is that when you see that first small debt paid off, you’ll be motivated to move on to the next one and so on and so forth.
But if you want to save money, the snowball method may not be the best way to pay off your debts. The high interest approach (I have no idea who originally devised it) suggests that you list your debts in order from the highest annual percentage rate to the lowest, make minimum payments on your debts with the lowest interest rates, pay as much as possible on your debt with the highest interest rate, and repeat until each debt is paid in full.
Which option you choose is between you and your spouse, your financial advisor, your accountant, and/or whomever else you involve in your financial decisions. But whatever you do, you need a plan. So create that plan today. Make a list of your debts. Determine exactly what you owe. (You’ll already know the debts and the amounts due if you’ve already completed the net worth spreadsheet.) Decide what method you’ll use to pay off those debts. And then get started.
If you’re a subscriber to my newsletter, you can access a printable goal-setting thermometer in the freebies section of this blog. Download it. Print it. Determine how much debt you want to pay off this year. (Remember to include your mortgage and your vehicle notes and student loans.) Divide that amount by ten. Mark up the snowball, and put it where you can see it: on your refrigerator or filing cabinet or perhaps in your home management binder.
As an example, if you want to pay off $5.000 by the end of 2017, each segment of the thermometer will equal $500. When you have paid off $500, color in the first segment; when you have paid off $1,000, color in the second segment. If you do not know what amount you will pay off this year, just make a “guesstimate” and divide by 10. Your math doesn’t have to be perfect. You are just trying to provide yourself with visible motivation.
Save time, save money, save your sanity: Taking steps to declutter your your financial life will help you save money and stress.
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