A Snowball Can Reduce Debt: A Debt Reduction Concept
Debt has become commonplace in our society and for many a huge problem. We go deeper into debt without always understanding why. A reason for this is the selling of credit. Today's retailers make as much if not more money selling credit as they do from selling their products.
When you go to purchase a new car you ask what the bottom line price will be. Soon however the discussion turns to payments, down payments and monthly payments, both low and seemingly very affordable. You drive away with a new car and you drive away carrying an increased burden of debt in the process. The profit margin for the dealer on the automobile may be rather small but the profit from financing can be very large and you'll be paying for it.
Like with so many other things in life, it's much easier to get into debt than to get out of it. So where does one start? There is a very effective way of climbing out of debt. It's called the snowball effect and here's how it works.
First, before you can even start putting the snowball effect into play you need to make a very firm commitment. You need to commit yourself to stop going deeper into debt. You can never borrow your way out. The only way out is to stop going further into debt and then begin to reduce that debt.
Once you've made the commitment you want to start putting some money aside as the second step. This is for an emergency fund. Three months income in a savings account is a worthwhile goal but if you can't afford that go a little lower. The purpose of this account is to give you a kind of insurance so that if an emergency arises you don't have to borrow to pay for it, the money is available and it's your money.
With the commitment made and an emergency fund in place you can now begin the third step, debt reduction, and get your snowball started. A good strategy is to take all of your debt balances and attack the lowest balance first. This may be a retailer's card or a credit card with a low balance. Pay these off while paying monthly minimums on the remaining debts, other credit cards, car payments and mortgage.
As you pay off the smaller debts you take what you've been paying on those debts and apply that money to the payments on the next larger debt. This is the snowball effect. By the time you get to your larger debts you are paying at the very least the minimum monthly payment plus an amount equal to your payments on all previous debts.
Once you get this process going you'll indeed find out how powerful it is. In addition, one reason for starting with the smallest debt first is that a small victory can give you the incentive to keep at it. You'll get some momentum started and find yourself with some new, improved behavioral habits. Of course as you proceed with your own personal snowball building process you want to keep your spending habits under control at the same time. It works!
When you go to purchase a new car you ask what the bottom line price will be. Soon however the discussion turns to payments, down payments and monthly payments, both low and seemingly very affordable. You drive away with a new car and you drive away carrying an increased burden of debt in the process. The profit margin for the dealer on the automobile may be rather small but the profit from financing can be very large and you'll be paying for it.
Like with so many other things in life, it's much easier to get into debt than to get out of it. So where does one start? There is a very effective way of climbing out of debt. It's called the snowball effect and here's how it works.
First, before you can even start putting the snowball effect into play you need to make a very firm commitment. You need to commit yourself to stop going deeper into debt. You can never borrow your way out. The only way out is to stop going further into debt and then begin to reduce that debt.
Once you've made the commitment you want to start putting some money aside as the second step. This is for an emergency fund. Three months income in a savings account is a worthwhile goal but if you can't afford that go a little lower. The purpose of this account is to give you a kind of insurance so that if an emergency arises you don't have to borrow to pay for it, the money is available and it's your money.
With the commitment made and an emergency fund in place you can now begin the third step, debt reduction, and get your snowball started. A good strategy is to take all of your debt balances and attack the lowest balance first. This may be a retailer's card or a credit card with a low balance. Pay these off while paying monthly minimums on the remaining debts, other credit cards, car payments and mortgage.
As you pay off the smaller debts you take what you've been paying on those debts and apply that money to the payments on the next larger debt. This is the snowball effect. By the time you get to your larger debts you are paying at the very least the minimum monthly payment plus an amount equal to your payments on all previous debts.
Once you get this process going you'll indeed find out how powerful it is. In addition, one reason for starting with the smallest debt first is that a small victory can give you the incentive to keep at it. You'll get some momentum started and find yourself with some new, improved behavioral habits. Of course as you proceed with your own personal snowball building process you want to keep your spending habits under control at the same time. It works!
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posted by Credit Counseling at
4:56 PM
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