Snowball method, the Harvard technique to reduce your debt

 

Reducing debt is the first step to achieve economic stability.

Were you going to buy a “normal” mobile and you ended up with the latest phone? Sometimes the expenses get a little out of hand and we end up with some holes that have to be covered. The debt of Spanish families in 2015 was the lowest recorded since June 2006, according to the Bank of Spain. However, the money invested by the Spaniards in their home represents the highest debt item, a total of 77.5% of it. But do not worry, if you have any debt we explain how to settle it with the Snowball Method?

Reducing debt is the first step to achieve economic stability. An important point is to always allocate a portion of what we earn to savings. Keep an eye on the Lohengrin app to manage your accounts and save every month. But before reaching this point, it is necessary to reduce the economic burdens, that is, the debts that haunt us. How? With the Snowball Method.

The Snowball Method

The Snowball Method

This system is focused on reducing debt, both in your domestic accounts and in your business. It is based on giving priority to smaller debts, instead of focusing on debts with higher interest rates. The Snowball Method was born as a result of the research of several members of the Harvard Business Review.

The experiment consisted of participants pretending that they had paid their debts virtually. After several analyzes, the researchers concluded that the factor with the greatest impact was not the amount that remained to be paid, that is, the remaining debt, but the amount they had managed to get out of the way once paid.

If you think about it, you probably deduce that it makes more sense to pay the bills with higher interest rates first. And you are right. But we must think beyond. People feel more motivated and hopeful when they see that part of their debts are being eliminated, however small. In other words, focusing on paying debts with less amount or interest rates tends to have a much more effective effect on the progress of total debt reduction.

The Snowball Method is not just an experiment. Many people are starting to use it every day to minimize their debts, find economic stability and start saving. An example is found in the blogger dedicated to personal finance, Derek Sall. This person managed to reduce the value of their debt by 100,000 dollars, including their mortgage, thanks to the Snowball Method.

His experience was so beneficial that Sall decided to share his spreadsheet on his blog to help with the repayment of the debt to other people. And we have collected this spreadsheet to help you reduce your personal or business debt. Upon entering the blog, Sall writes the following: “ I suggest that people pay their debts from least to greatest. You will deal with them more efficiently and you will be able to eliminate all of them sooner than you thought. ”

How to use the Snowball Method

How to use the Snowball Method

Based on the Sall spreadsheet, let’s see step by step how to deal with payments. It is a simple and easy way to understand how to use the Snowball Method.

1. First you have to calculate your economic capacity. To do this, you can help yourself with the Lohengrin app, to find out how much debt you can currently pay, fixed expenses or your maximum budget. The greater the economic effort you make now to take off your debt, the less you will have to pay later and, therefore, the sooner you will achieve stability.

2. Once the first point is covered, you have to calculate how much you can allocate to the higher debts. The idea is to see if you have the capacity to allocate a larger amount each month to pay them.

3. Finally, you must enter in the spreadsheet that you have created all the debts you have, ordered from least to greatest. You must include the interest rate of each of them and the minimum monthly payment for them. With this calculation you can check how many months you will have to devote to the payment of your debts until you can eliminate them completely.

What do you think of this method? Have you ever considered it? We are certain that it works by itself, but to notice the results you need to know the total volume of your debts. It is important that you manage the remaining amount of your debts and how you pay them month by month. As you can see, the organization and your motivation is very important to eliminate your debts. You will see how when you have managed to organize you will start to build your economic mattress and goodbye to your debts!

Leave a comment

Your email address will not be published.