Monday, March 11, 2013
Snowball VS. Top Down
There are 2 ways to start pounding out your debt: the snowball effect and the topdown approach.
First you need to list out every debt you have, except your mortgage. Remember, we're trying to wipe out all of the debt except that one first. You might also want to write down the percentage of interest you're paying on each balance. Now choose one of the following ways to start knocking down that debt as quickly as you can.
Snowball effect: pay as much as you can on the account with the lowest balance while paying only the minimum on the others. Once the lowest balance is paid off, put all the money you were paying for that onto the next lowest balance. Repeat the process until all debt is paid off. You will quickly reduce the number of bills you pay each month, and you will feel a bigger sense of accomplishment by cutting them out quicker.
Top down approach: Use the idea from the snowball…all of your extra money on one bill…only this way do it on the bill that has the highest interest rate, not counting your mortgage. Overall you will end up paying less in debt by getting rid of the higher interest rates first, but you will need to stay on top of all of the smaller ones each month so they don’t get lost in the shuffle.
Example...you have 3 debts as follows, and you have $50 extra a month to put on something
Visa $500 12% interest minimum payment $25
Store credit card $1000 23% interest minimum payment $50
Car loan $13,000 4.9% interest monthly payment $300
For the snowball effect you would
pay $75 on the Visa
keep the other payments at the minimum
as soon as the visa is paid off you would pay the $50 a month on the store card PLUS the $75 you were paying on the Visa for a total of $125 a month
as soon as the Visa is paid off you would pay $300 a month for your car PLUS the $125 you were putting on the store card for a total of $425 until all is paid off
For the Top down approach you would
put the extra money on the store credit card until it was paid off since it has the higher interest rate, then you would go to the Visa card, then the car
Personally, I like the Snowball effect. It gets rid of the smaller bills quicker leaving me fewer bills to keep track of every month. But, if you have a lot of high interest, the top down might work better for you. That's entirely up to you.
Write it down, compare the plans, and start paying off you debt!