Sunday, April 3, 2011

Guest Post: Debt Stack vs. Debt Snowball

Today I'm featuring a guest post from my friend Kevin at DebtEye. Kevin blogs about all things personal finance, with an emphasis on debt reduction and solutions for those with ailing finances. Go check out his blog - you can also read my guest post, Five Unnecessary Bankruptcy Fears, while you're there. Let Kevin know which method you prefer - debt stack or debt snowball - in the comments.

If you’re having some sort of debt problem, you’ve probably considered some options such as: debt settlement, bankruptcy, or credit counseling.  However, if you’re current on your payments (not behind), there are several options to pay down your debt.  We will examine two common strategies to pay off your debt without seeking help from a debt relief company.  I always encourage all my readers that the most important part of this process is learning how to budget!  It doesn’t take a rocket scientist to develop a budgeting plan.  All it takes is discipline and willingness to get out of debt.

Debt Stacking

The first option we will explore is called “debt stacking.”  Debt stacking is a simple method to pay down your balance in the shortest amount of time without changing your monthly payments.  The concept is quite simple.  After you create a budget (important) and decide how much you can allocate towards paying down your debt, you will make the monthly minimum payments on all your accounts except the one with the highest interest rate.  After the account with the highest interest rate is paid, you will apply that payment to the next account with the highest interest rate. 

For example, let’s say you had three accounts:  Visa - $5k @ 18%, Discover -$3k @ 29.99%, & Chase- $2k @ 9.99%.  You figured out that you can make a monthly payment of $350 towards any of the accounts.  Respectively, the monthly minimum payments are as followed: $150, $110, $40.

The account you want to focus on paying first is the Discover account (since it has the highest interest rate).  You will apply $150 to Visa and $40 to Chase, leaving you with $160 to pay towards Discover.  After this debt is paid off, you will pay off the next highest interest rate, which is Visa.  This time, you will make the minimum payment for Chase $40 and apply $310 towards Visa.  You will continue this process until all accounts are paid in full!

Snowball Method

The next common option is called “debt snowball”.  This method requires you to pay off the smaller balances first.  As you start to pay down the smaller debts, you will see immediate results and be motivated to stay on track.  This method also requires keeping your monthly commitment constant.  Every time you pay off an account, take that payment and apply it to the next account with the smallest balance.  It’s called a “snowball” because this method creates the greatest momentum throughout the process. 

Both techniques require you to hold your payment constant.  It can be a daunting task to keep up with these payments.   Debt stacking is the most efficient approach of the two options mentioned.  You will typically see a 10% savings compared to the snowball method.  It will be a difficult road ahead, but patience and determination will play a pivotal role in your quest to become debt free. 

Author Bio: Kevin is a writer for DebtEye is a place where you can get unbiased opinions on anything related to personal finance. Kevin owned a debt settlement company prior to joining the DebtEye team. He is a certified debt specialist and also works with credit counselors across the nation.


Alltid Blakk said...

I prefer the snowball method. If I wasn't such a sucker for quick fix, and "I want it now"-thinking I wouldn't be in this mess in the first place. So yeah I go for the one with the fastest reward. Or rather given my pace - the snowflake method.

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