The Snowball method is one of the best ways of getting out of debt once and for all. I wrote about the method in my book Deceptive Money. It is real easy to understand. For example, let’s say you have 4 debts of 2,500 for a total of $10,000. Let’s say you pay $250 a month for each debt for a total payment of $1,000 per month. The whole idea is to commit to the $1,000 payment until all debt is paid off. So, if you pay off one of the debts before the other 3, you don’t reduce your payment from $1,000 down to $750. You commit to the $1,000.
Which debt do you allocate the $250 monthly payment? Do you apply the $250 towards the smallest debt or to the debt with the highest interest rates?
A Journal of Marketing Research Study that is due to be released found that meeting small goals motivates people to reach larger goals. Researchers conclude that the results of this research study would carry over to debt repayment strategies. This “small victory” of paying off a smaller debt could motivate a consumer to get out of debt faster.
On paper this makes sense. In reality, this concept of the small victory doesn’t work very well. First, the small victory method could end up compromising the snowball method. One could rationalize that one of the debts is paid off and that the $250 could be spent or saved versus paying down on debt. Second, mathematically it doesn’t make sense. A consumer gets out of debt much quicker by applying the payment to the higher interest rate. Finally, I don’t think that a person needs this type of motivation. They need to be able to see the plan and know ahead of time their get of debt date.
So, if you need a little motivation, try this technique. Set up your snowball effect and run the numbers ahead of time. At the end of each year know what you balances need to be with each debt. Best of all, know your debt free date. Keeping your eye on the prize will help you stay motivated to get out of debt once and for all.
For information and live examples of how the snowball method works, check out my book Deceptive Money. It is the step by step authority on getting out of debt the right way. www.deceptivemoney.com