Posts Tagged ‘Debt Management’

As a general rule it makes a lot of sense to use delayed gratification when it comes to money.

You should endeavour to only borrow money for things that do not lose value. If you borrow money to buy things that do lose value, you are not getting the most out of your money and you run the risk of never reaching your full financial potential.

Sure you can have lots of things now, but you have to wear the consequences later on and the pleasure now may not warrant the pain then.
I have seen people run up huge credit card debts for things they just ‘had to have’.

This is a common situation, and my recommendation to get back on track is using a method called “snowballing”. What this means is to concentrate as much extra money as possible onto one of the loan payments until it is finally paid off.

There can be confusion as to which loan to tackle first, and certainly an argument could be put forward to suggest it should be the one with the highest interest rate, but there are other attributes to take into account also.

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In one of my Money Hints and Tips newsletters I refer to a strategy I call Repayment Snowballing. This is used to speed up the process of debt management quicker . There are a few different opinions on how best to implement this strategy so lets have a look at which will save you the most money. There are basically two trains of thought.

Debt Management Strategies

1. Pour any surplus cash into paying off your smallest debt first and then when that debt is paid off, adding (snowballing) that repayment onto the next smallest debt until it is paid off or the debt management is achieved. Continue this process, always adding the repayments from the paid-off loans to the next smallest debt until all debts are cleared. (At which time you could give your self a big pat on the back and swear to never put yourself through such agony again!)

2. Pour any surplus cash into paying off your highest interest rate debt first and then, when you’ve achieved debt management for and paid that debt off, adding (snowballing) that repayment onto the next highest interest rate debt until it is paid off. Continue this process, always adding the repayments from the paid-off loans to the next highest interest rate loans until your debt management is complete.

These look very similar don’t they! The point in question here is, do you tackle the smallest debt first, or the highest interest rate debt first?  I simply suggest there could be an argument either way. Psychologically, paying off a small debt quickly can give you a sense of actually achieving something. This can do wonders for your sense of mental well being and provide motivation to go on working at the problem in a positive frame of mind. Mathematically though, it is easy to show that tackling the highest interest rate debt first will always save you money.

Click here to download our FREE Debt Calculator to work out the best strategy for your credit card management.

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