If you’re struggling to pay off debt, you’re not alone. The average household with credit card debt owes $16,061, according to a recent report from NerdWallet.
And although there are many strategies to eliminate debt for good, one method proves to be the most effective: prioritizing accounts with smaller balances, rather than those with higher interest rates, otherwise known as the snowball plan.
That’s according to new research from the Harvard Business Review. After conducting a series of experiments in which participants simulated paying off virtual “debts,” researchers concluded that the factor that had the greatest impact on how hard participants worked was not the amount they repaid or how much was left in the account afterward. it was the percentage of the balance that they ended up losing.
While it makes more mathematical sense to pay off accounts with the highest interest rates first, they found it was more motivating for participants to see small balances disappear.
“Focusing on paying off the bill with the smallest balance usually has the most powerful effect on people’s sense of progress – and therefore their motivation to continue paying off their debts,” writes Remi Trudel, one of the HBR researchers.
Personal finance blogger Derek Sall knows that feeling all too well. He used the snowball method to pay off approx $100,000 in debt (including his mortgage).
The strategy worked so well for Sall that he decided to share his spreadsheet for paying back debt on his blog, “Life and my finances,“ to help others take advantage of it.
“I suggest people pay off their debts from small to large and ignore interest rates completely,” he said writes on his blog. “Sure, that 18% credit card debt could drive you crazy. But if you tackle the smaller debts with intensity, like I know you want to, you’ll get to it faster than you think — and then solve it faster than you do.” ever thought possible!”
While your debts may seem overwhelming, the spreadsheet breaks them down into a simple payment plan. Here’s how to use it:
- Find out how much you can spend paying off debt now. The higher you can make that initial lump sum, the less you will have to pay later.
- Find out how much you can spend on your debts beyond the minimum monthly payment.
- Enter all debts, from smallest to largest, including interest rate and minimum monthly payment for each. The spreadsheet will automatically calculate how many months it will take you to be debt free if you focus on paying off one bill at a time.
Here’s a look at the bottom of the spreadsheet, showing how many months it will take you to pay your debt in total:
For a more detailed explanation of how the tool works, click here.
After figuring out how long it takes to achieve financial freedom, Sall recommends figuring out how to speed up the process. “The sooner you tackle your debt snowball, the more likely you are to finally get out of debt!” he repeats.
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