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Installment 3- Snowballing v. The Interest Game

Before I lead you on, the answer is yes. This is a slightly clever take on our timeless childhood snow days, but we’ll get into that later.

If you’ve been following my pieces, we’ve discussed how to determine your current financial status, budgeting, and incorporating financial stability in your current or potential relationships. Now let’s say you’ve done those steps, but now you’re trying to decide which debt you should start chipping away at first.

There are several ways to pay off debt, but two of the most common ways, we’ll refer to as, the interest game and snowballing.

The interest game refers to focusing on the debt with the highest interest rate. This method will save you the most money in the long run. By eliminating your highest interest rate loans first, you’re getting rid of your larger interest payments. Which is as you know, paying interest, is just handing the lender money, for the privilege of borrowing their money. As most people detest handing over their money, the interest game is a very popular method.

However, my favorite debt repayment strategy is the snowball method. Start with your largest monthly payment, and eliminate the loan attached to it, first. Here’s where the snowballing comes in to play. You know how when you roll a snowball in the snow, and the more you roll, then the bigger it gets? Well that’s essentially what you’re doing with your monthly payments. After you pay off the loan with the largest payment, you then take that payment and use it towards the next largest loan. Then after that one is repaid, you put both payments now on the next loan, and repeat this process until your debt is clear. Just think of that first loan pay off, as a snowball attacking your smaller debts, and it becomes larger, and larger with each pay off. Until eventually crushing your debt like the soul suckers they are!!...Too much?... I digress. This method also gives you a metaphorical pat on the back with each loan pay off. Sometimes attacking the higher interest rate loans can take a little longer for that initial pay off satisfaction. However, it really depends on your situation, and only you can determine what is the best option for your finances.

As a bonus tip, don’t be afraid to look into refinancing your loans as well. As interest rates are on the verge of an imminent increase, now may be your last chance to lock in a lower rate. However, there are a few things to consider when looking into refinancing or consolidation.

1. Does it significantly prolong my pay off date? Remember more time to added to a payoff date, equals more interest dollars you pay to “the man.” (I always wanted to say that.)

2. Is this new interest rate drastically higher than my low interest loans? Some companies will take an “average” of your loan rates, and give you, sort of a blended rate. However, if your highest interest loans have a low principle, and you feel they could be paid off sooner than the expected pay off time. Then it might not be worth it to increase the interest rate of your lower loans, if your higher interest debt could be wiped out sooner, leaving you with only low interest debt.

3. Does the lower monthly payment really make a difference? This is an important one, especially if you’ve answered yes to either, or both, of the above questions. Sometimes, if something seems too good to be true, then it probably is. If you receive an offer that drastically lowers your monthly payment, but extends your pay off date 2 or more years, then run! The only way this situation can work in your favor, is if you plan to pay the same amount as you did before, except now the difference between what you pay and the new mandatory payment, is pure principle dynamite. I personally chose a longer pay off date when getting my first car loan. It was great for me, because the mandatory payments were something I could handle on a small income, but whenever I had enough, it felt great to pound away at my principle, essentially paying off my loan much earlier than the anticipated payoff date.

So, in closing, choose wisely friends. Remember, that a debt sentence doesn’t have to be a financial death sentence.

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