Snowball Plan
One debt repayment plan that’s popular if you have read many personal finance materials is Dave Ramsey’s “Snowball Plan.” Here’s how it works:
List your debts in order from lowest balance to highest balance. Don’t take into account the interest rate. We’re just focusing on the balance of the debt.
Allocate as much of your monthly budget as you can to paying off the debt with the lowest balance.
Once the debt with lowest balance is paid off, you add the money that had been going to that debt to what you’ve been paying against the next lowest debt. Each time you pay off a debt, the amount you can apply to remaining debts is a little bigger. Thus, the name “Debt Snowball Plan.”
The benefit of the debt snowball plan is psychological. By having success paying off small debts first, you’ll receive instant positive feedback that can encourage you to continue paying down your debt.
The drawback to the snowball method is that you’ll end up paying more in interest than you would if you went after the debt with the highest interest rate first. However, if the idea of paying off a RM 5000 credit card bill seems too daunting, go after the low hanging fruit by paying off the RM 400 bill first. It will hopefully get you started down the path of reducing your debt.
Tags: Dave Ramsey, debt repayment plan, Snowball Plan