A Snowball Can Reduce Debt: A Debt Reduction Concept
Debt continues to be a huge problem in our American society. Many of today’s retailers no longer sell products rather they sell credit. If a retailer can successfully sell credit to the consumer alliance then the margin they stand to gain is significant.
Let’s take car dealerships as an example. Go to a used car dealership and see if they would like to talk bottom line price with you. I can ensure you that they will be much more interested in talking about payments than price free in five. The reason for this is they are selling credit.
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.
The first thing you need to do is to make a commitment that you’re not going to fall further into debt. This is a very necessary step. If the commitment is not there the subsequent steps will likely not work. One very simple truth is that you can never borrow your way out of debt,yet many try to do just that.
Second, once you’ve taken that all important first step you need to set some money aside in what we’ll call your emergency fund. Put money into a savings account. Three months of income would be a good goal but you may have to settle for a bit less at first. This is money you use for emergencies only and is there for your use as opposed to going into debt to pay for an emergency. It’s really a type of insurance against incurring further debt.
The third step to be taken is to find your lowest debt balance. For example you may have a mortgage (100k), a couple of car payments (15K), a couple of credit cards (5k), and a retailer card (2k). The lowest balance in this scenario would be your retailer credit card.
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.
Two very good reasons for starting with the smallest debt balance is that it’s the easiest to pay down plus you get an emotional boost from gaining a small victory. You’ll soon find yourself with a set of behavioral patterns geared to getting out of debt rather than going in to debt. It’s important of course that while your busy building your snowball that you continuously strive to keep you spending in check. You’ll find this process very satisfying indeed and it works!
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