At some point in your life, you may find yourself with more debt than you can reasonably handle. A popular strategy for getting out of this mess is consulting with a debt consolidation company. This may not always be a bad idea, but it will negatively affect your credit score for a time, and it won’t always fix your problems in the end. A better solution is to apply a technique called snowballing. I recall one year in the past when I managed to pay off 3 bills that were plaguing me for years using this technique. Yes, I said one year. That’s all it took to pay off those three bills. And I never had to change my lifestyle to do it! Here is how you can apply the technique:
- Arrange your bills in order from highest to lowest interest rate
- Look at the top 3 bills and choose the one with the lowest balance
- Now focus all your efforts (and excess money) on paying this bill off until it has been paid in full
- Rinse and Repeat, taking your old monthly payment you were applying to the previous bill, and applying it to the next bill
The most important thing to remember is that, after you finish paying off a bill, you are disciplined enough to take your new-found monthly wealth and apply it to the next bill. For example, let’s say you determine that your Mastercard bill is your initial focus (it was one of your top 3 bills with the highest interest, and also had the lowest balance). You pay only the minimum payment for all other bills, and put any excess money toward your Mastercard payment. Let’s say your minimum payment is $40. Let’s also say that you have $100 extra per month that you can pay toward bills. Then you’ll pay $140 per month on your Mastercard. When that’s finally paid off, you’ll select your next bill… let’s say this is your new furniture payment and that the minimum payment is $25. Then you’ll take the money you were spending on your Mastercard ($140), and add it to the minimum furniture payment ($25), to get your new payment for the furntiure bill ($165). You’ll then pay off your furniture and add $165 to the next bill, and so on.
Debt consolidation should always be a last resort, because of the negative (even if it is temporary) effect on your credit score. Many people go this route unnecessarily when snowballing would have solved all their problems. In addition, snowballing allows you to gain the discipline to stick with your financial planning, so that you won’t have any further problems with debt in the future. Debt consolidation companies will take care of all of this for you, and you will subsequently never get a chance to learn how to properly manage your own money… i.e. you’ll eventually run into the same problems again, and have to do it all over.