In one of my Money Hints and Tips newsletters I refer to a strategy I call Repayment Snowballing. This is used to speed up the process of debt management quicker . There are a few different opinions on how best to implement this strategy so lets have a look at which will save you the most money. There are basically two trains of thought.
Debt Management Strategies
1. Pour any surplus cash into paying off your smallest debt first and then when that debt is paid off, adding (snowballing) that repayment onto the next smallest debt until it is paid off or the debt management is achieved. Continue this process, always adding the repayments from the paid-off loans to the next smallest debt until all debts are cleared. (At which time you could give your self a big pat on the back and swear to never put yourself through such agony again!)
2. Pour any surplus cash into paying off your highest interest rate debt first and then, when you’ve achieved debt management for and paid that debt off, adding (snowballing) that repayment onto the next highest interest rate debt until it is paid off. Continue this process, always adding the repayments from the paid-off loans to the next highest interest rate loans until your debt management is complete.
These look very similar don’t they! The point in question here is, do you tackle the smallest debt first, or the highest interest rate debt first? I simply suggest there could be an argument either way. Psychologically, paying off a small debt quickly can give you a sense of actually achieving something. This can do wonders for your sense of mental well being and provide motivation to go on working at the problem in a positive frame of mind. Mathematically though, it is easy to show that tackling the highest interest rate debt first will always save you money.
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