Snowballs – or – Big Bang?

I went to a workshop on time management recently. I found out I should have 38 hours of time left in my week after I accomplish the regular things like sleeping, eating, working, and commuting. Are you kidding me? As someone else said, I’m lucky if I have 38 minutes left after I get all the essential things done. Worst of all, the instructor implied it’s easy to find these extra hours and plan to use them wisely. That didn’t sit well with me. I would rather learn from someone who understands the difficulty I’m facing than someone who implies it’s really a simple problem.

I find it’s that way with finances too. There are a few easy things in finances but it’s the hard ones that need our attention and I’m not going to sit here telling you they are easy. One of these things is handling debt.

If you are struggling with some kind of debt right now, you know what I’m talking about. There is only so much money coming in and always many expenses. If you have several different debts, it can become hard to manage them and know how to smartly pay them down. I like to think about debt management with two basic approaches.

The Snowball Method

With this method, you list your loans from smallest to largest and put any extra money to paying off the smallest one first. Each time you pay off a loan, you take the money you were paying toward that loan and send it to the next largest loan. As you pay off more loans, this amount grows like a snowball and you’re able to devote more money to paying down each loan. The benefit of this method is that you see the results sooner if you pay off the smallest loan first. It’s kind of like losing those first 5 pounds when you go on a diet and that inspires you to keep going.

The Big Bang Method

As much as I like the quick payoff and simplicity of the Snowball Method, I prefer the Big Bang Method of paying off loans. In this method, you list your debts from the highest interest rate to the lowest and focus on paying off the highest rate loan first, getting the biggest bang for each dollar you pay. The reason for this is that the highest rate loan is growing the fastest and making your debt problem worse. It’s kind of like patching the largest hole in a boat before the smaller ones. The largest hole is going to sink you faster than the smaller ones. In the same way, the highest rate loans are holding you back more than the lower rate ones so getting rid of them first is a strategy that uses your money most efficiently.

Which one of these should you use? I recommend the Big Bang Method because it helps you slow the growth of your debt. But it’s really up to you. The important thing is to decide which one fits your approach best and stick with it. The key to most financial solutions is coming up with a plan and sticking with it. If debt is something you’ve been struggling with, give one of these methods a try. If, however, your debt is too much to manage by yourself, see a professional who can help you get control of the situation. Managing debt isn’t easy, but at least you now have some tools to use.

Now I need to figure out what I’m going to do with my extra 38 minutes this week.