There are many ways to get out of debt. Some are helpful; some are actually
harmful. One strategy that often fails is debt consolidation. In our
opinion there is always a better way.
Debt consolidation looks so appealing, but there are some dangers. You will
possibly end up paying a much higher rate for a much longer term, so it costs
you dearly. Also, debt consolidation can backfire if you look at your new, low
monthly payment and decide that you can afford to make some other purchases on
credit. Then you repeat the cycle that got you into financial bondage in the
first place.
Remember that there are companies out there who seem to be offering you
help, but in reality they are just increasing your financial bondage and their
profits.
A far better system is one that helps you develop discipline and contentment
while giving you the satisfaction of seeing your debt load steadily decrease.
That is the beauty of the Snowball. I must tell you that we do not know who
first came up with this plan or the name for it, but whoever it is we thank
them! Many people have been helped by it.
Here's how the Snowball works:
-
List all your creditors. Do not include your mortgage or house rental
payment.
-
For each creditor, divide the amount owed by the minimum monthly payment.
Here's an example:
$1000 (amount of debt) divided by $50 (minimum payment) = 20
$2000 divided by $40 = 50
$500 divided by $50 = 10
Do that for each debt.
-
Now choose the debt with the lowest number. In the example above it would
be the $500 debt since it will be paid in ten months.
-
Next, determine what amount from your regular income you can add to the
$50 each month. Let's say you can double it each month. No you are paying $100
on a $500 note so
you will pay it off in five months instead of
ten!
-
That's good, but now the real fun begins. Since you are already accustomed
to paying $100 each month on that debt, and since it is now paid off, add that
$100 to the next highest monthly number. (In our example you would increase the
payment on the $1000 debt from $50 to $150.) By doing that
you will pay it
off in about seven months instead of twenty months!
- Repeat the process with each debt, being careful to not incur any
additional debt and you will be debt free in a much shorter time.
-
The last step, once you retire all debt, is to place the full amount of
the payments into savings each month. Follow this plan and you will learn
self-control, financial discipline, and faithfulness.
Does the snowball work in other cultures outside America? We wondered about
that. Then we met a young man whom we had given those principles to about three
years earlier. At the time he had just finished university, but still had many
debts. He followed those principles and is, today, debt free and smiling!
The two keys to making this plan work are discipline and
contentment. Both of those qualities will make you a stronger, much
more stable person, and the debt monster will have to find another victim.
What is the hardest thing for one person to do for another? Some would say
forgiving. Read Forgiveness, our next article in
this series. It will clear up much of your confusion about this important
subject.
