How To Pay Off Your Debt Using The Snowball Effect
The Snowball Effect Review
The Snowball Effect is a very popular method of debt repayment that was originally introduced by financial guru Dave Ramsey. Dave Ramsey is known for counselling those people who have become stuck in mountains of debt that they can no longer negotiate their way free from or at least they believe that their situation with their debt is nearly hopeless and that they will never be able to pay that debt off. The Snowball Effect takes all the aspects of your personal debt into account: The plan will depend upon your balances, and you will implement the plan in your own unique way based on what you owe to which creditor.
The Snowball Effect is so named due to the fact that once debt repayment begins, in gathers momentum: You begin by paying off one smaller debt, then that debt repayment increases your financial ability to pay off the next debt, and so forth. Just like a snowball, the debt repayment gains power as it continues rolling! There are many people who are strong advocates of the Snowball Effect, however there are also some who feel that there are other more effective debt repayment strategies available. In this article we will be explaining the Snowball Effect in detail and talking about the pros and cons of the Dave Ramsey method.
How Does The Snowball Effect Work?
Dave Ramsey recommends that the initial phase of the Snowball Effect is stopping all payments on credit cards, except for the minimum payments. The idea is that by trying to pay extra money towards a number of different cards at one time, the debt repayment effect is diluted. The recommendation is to stop all except the minimum amount to each card, and then use all of the money that was formerly going to paying more than the minimum for one single purpose. Basically, instead of trying to pay a little bit extra on a lot of different credit cards, you will be paying a lot extra on one single card.
How To Pay Off Your Debt Using The Snow Ball Effect
The card that you will be focused on in the initial phases of the Snowball Effect plan is the credit card with the smallest balance. Even though this might not be the card with the highest interest rate, Ramsey cautions against concerning yourself with interest rates at this stage of the plan: Simply select the credit card that has the lowest total balance, and begin applying all extra funds to that card first, while still paying the minimum payments towards all of the other credit cards.This will continue until that debt has been fully repaid.
Once that first debt has been eliminated, you will move on to the next smallest debt. All of the money that you were formerly paying to the first debt can now be applied to this debt, while still continuing to pay the minimum balance due on all other cards. The repayment snowball will continue in order, paying the debts smallest up to largest.
Ramsey says that the only time interest rates need come into play is if two debts are similar in size: In this case, you would pay the credit card with the higher interest rate first. The Snowball Effect will eventually culminate in the total repayment of all debts, with living debt free as the ultimate goal.
The Pros Of The Snowball Effect
Supporters of the Snowball Effect praise its simple plan. Virtually anyone can understand and implement the Snowball Effect debt repayment plan, even if they do not have an in-depth understanding of financial details like annual percentage rates and even if they are far from being a financial expert. The plan can help a person to get out of debt in a fairly rapid fashion, especially if you have realized that there is a debt problem early on. The Snowball Effect allows its users to feel a real sense of accomplishment as they wipe out their debts in order, and this feeling keeps motivation high to continue with the plan and to eventually wipe out debt completely.
The Cons Of The Snowball Effect
The Snowball Effect may not be a perfect debt repayment plan for everyone. Detractors of the Snowball Effect say that the plan may not be financially ideal: Rather than paying off the highest interest debts first, the Snowball Effect pays off the smallest overall debt first — no matter what the interest rate of that particular debt is. This means that users of the Snowball Effect plan will continue to pay high interest on credit cards for longer than they might otherwise have to. For example, if the largest debt is also the highest interest debt, this can add up to a great deal of money in finance charges. However, the Snowball Effect plan user will have to continue to pay this high interest rate until they work their way up to paying that largest debt.
Is The Snowball Effect The Plan For You?
The Snowball Effect is very effective for millions of people, but are you one of them? The suitability of the Ramsey plan for you all depends on what your goals are. Do you want to completely eliminate debt from your life? Do you feel overwhelmed by the amount of credit card debt that you find yourself in? One very important question to ask yourself about the Snowball Effect is simple: Are you ready to give up your credit cards?
Any effective debt repayment plan, including the Snowball Effect, will require you to stop using your credit cards. After all, if you are continually adding to the balances of your existing credit cards or adding new cards to your wallet — you are not going to be able to effectively follow the Snowball Effect or any other plan. Once you cut the credit cards from your life and focus on paying them off rather than using them constantly, you will be surprised how very quickly and effectively you can pay your debt down for good! Overall, the Snowball Effect is generally considered one of the most efficient ways for any person to get out of debt fast. This is also seen as an alternative to debt consolidation loans.
Here is Dave Ramsey explaining the Snowball Effect in the video below. Must see, enjoy:
