Photo by kamshots

One of the most popular debt reduction plans is the snowball method. Almost anything you read on reducing debt will include an explanation of the snowball method, whether it uses that name or not. The method involves paying the minimum monthly balance on all debts except for one, to which you consistently pay a set amount over and above the minimum repayment amount. Once this debt is paid off, you apply your repayment amount to the next debt and so on.

Which debt do you make extra repayments on first?

There are several ways to approach the snowball method of debt reduction, but paying off the debt with the highest interest rate first makes the most mathematical sense. Paying off debts in order of interest rate is going to save you the most time and the most money.

I’ve used this method in the past (although I hadn’t heard of the snowball reference then) and it’s a powerful way to chew through debt. Here’s an example of how it works:

(more…)