Information you need to live a happy, worry-free retirement!
Jun 26, 2012
Math Isn’t Everything
A long time ago—back before you ever had any bills to worry about—you likely suffered through a dreary high school physics class as the teacher explained the concept of momentum. It didn’t seem like useful information at the time, but now, surprisingly, it’s an idea that might just help get you out of debt.
One of the most effective ways to eliminate your debt is to visualize your debt being paid off like the proverbial snowball rolling downhill, gathering mass and speed as it goes. The method has been popularized by personal finance guru Dave Ramsey and incorporates psychological as well as mathematical factors. Here’s how it works:
Smallest to largest
First, list all your credit accounts in order of balance, from smallest to largest. Make minimum payments on all but the first account, and then use all available cash to pay as much as you possibly can on the smallest debt. When that first account is paid in full, begin applying larger payments to the second account, and so on. Be sure to pay the same amount, in total, to your debt retirement plan every month, even after you’ve paid off an account.
Mind over math
Logically speaking, you should pay debt with the highest interest first, but Florida certified financial planner Robert Finley explains that math isn’t everything! “Two valuable results come from prioritizing lowest balance debts,” he said. “First, you can clearly taste the sweetness of the beginnings of victory with every debt that is satisfied. Second, you buy yourself some breathing space and flexibility, just in case you encounter an unavoidable emergency.”
Psychologically, most people tackle a large goal by breaking it into smaller, manageable chunks. The debt snowball strategy helps you focus on quickly-achievable targets that will keep you motivated and minimize discouragement.