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Snowballing by balances owed
There are several different ways to deal with debt. When you have multiple debts, one way to deal with them is called snowballing. You begin by making a list of your debts with their interest rates and balances. Using a spreadsheet such as Excel, Google Docs or OpenOffice Numbers is the best way to do this. Sort (or arrange) your debts in order of balance owed from highest to lowest. Begin by increasing your payments on whichever debt has the highest balance while continuing to make the minimum monthly payments on the others. When you finish paying off that debt you will have extra money you can use to pay off the debt with the second highest balance and so on until you’ve cleared all your debts.
Snowballing by interest rates
A second way to pay off debt is by interest first. Here, you would order your debts by interest rates, again from highest to lowest. You would then pay off the debt with the highest interest rate then the one with the second highest interest, etc.
No clear consensus
There has long been a debate among experts in personal finances as to which of these is better. So far, there has been no clear agreement as to which is best. However, I read recently of a third way to pay off credit card debt that might make the most sense. It’s called the debt tsunami.
Introducing the debt tsunami
I found this is on the website Man vs. Debt ( manvsdebt.com). The way it works is fairly simple. You first pay off your debts in order of the emotional impact they have on you.
As you may know, an underwater earthquake, volcanic eruption or a shift in tectonic plates, can cause a tsunami. It often starts far out in the ocean then grows exponentially in size and ferocity until it reaches the shore where it becomes massively destructive.
How to tap into the power of a debt tsunami
The way this strategy works is that you organize your debts, again by balances owed and interest rates, but this time from lowest to highest. You make a total commitment to paying off those debts, which gives you an initial burst of energy just as a tsunami begins. You do everything you can to pay off the debt with the lowest balance first, then move on to the second. Like a tsunami, you’ll have started small. But when you pay off that first debt, you’ll get an emotional boost that will help you move on to tackle the debt with the next lowest balance. You’ll be building energy and momentum. Pay off that second debt and you’ll have built up more momentum. You’ll feel great knowing that you’re on you way to being debt free.
Get emotionally involved
Review your list. Think about the emotional impact you’d feel when you paid off each of your debts. How about that $5,500 you owe on your student loans? Would it make you feel like a conquering hero if you were to pay it off? Then maybe you should move it up higher on your list even though there are five debts with lower balances. Get in touch with your debts. Be flexible. Just make sure your list of debts will help you create that tsunami that will eventually help you become debt free