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.

Now that we have all been victims of this approach by retailers and credit card companies, how do get out of this debt? Where do we start? I am going to explain to you the snowball effect to eliminating debt.

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.

The second step is to save some emergency money. I would say a good starting point is 3 months income. You need to have this money saved and in an easy to get to savings account. This money will be used in case of emergencies only. This will be your insurance to not having to incur further debt.

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!