There are two main methods of debt elimination; (a) the Smallest Debt Method and (b) the Highest Finance Charge Method. For method (a) you would list all your debts starting with smallest debt on the top line of a chart and then list the next largest debt on each line below until the last line shows the largest debt you currently owe a single creditor. Next to each debt list the name of the creditor then the required minimum monthly payment. You would then pay the minimum monthly payment for all the debts and pay all surplus money along with the minimum payment for the smallest debt until that debt is totally eliminated.
Method (b) would have you list all your debts starting with the one with the highest finance charge on the top line of the chart and then list the one with next highest finance charge on each line below until the last line shows the one with the highest finance charge you are currently paying. Next to each debt you would list the name of the creditor, the finance charge percentage, and the required minimum monthly payment. You would then pay the minimum monthly payment on each debt and put all surplus money with the minimum payment for the debt with the highest finance charge until that debt is totally eliminated.
The smallest debt method (sometimes called the snowball method) gives you a psychological benefit by helping you quickly eliminate small debts, which motivates you to continue the process. Most people usually have a few creditors to whom they owe several hundred dollars. The highest finance charge method (sometimes called the avalanche method) minimizes the amount of finance charges you pay during the process of eliminating debt. Most people’s highest finance charges tend to be on debts with higher balances. People who engage the smallest debt method are far more likely to stick with the process (because of quick payoffs on a few accounts within the first few months of engaging the process) than are people who chose the highest finance charge method.
There are a small number of math / accounting genius’ who love tracking and getting the most out of the math and thus are excited about using the highest finance charge method. However, most people’s biggest problem is behavior not math calculations, and they have short attention spans with regard to following particular processes unless the process more quickly shows them a benefit that will turn into greater benefit down the road as they continue to use the process. If they had been operating in a higher math intellect all along then they would not be in financial bondage in the first place. Thus, they were engaging in poor behavior which is what led to their financial predicament. In this regard, they will do far better following the smallest debt method, which motivates them to correct behavior and continue on the road to total debt elimination.
Total debt elimination using the smallest debt method on average takes six weeks longer than when it would come using the highest finance charge method and it allows the average person’s debt to be paid off in 2 to 3 years or less while paying only a little more in interest than under the highest finance charge method. Yet, if one starts the highest finance charge method and does not continue on the path until completion then no method will benefit him, regardless of the fact that his math-genius-self thought the highest finance charge method was the best. Thus, the smallest debt method is generally the one people should use to get out of debt.
Before using this approach it's best to establish an emergency fund of at least $1,000 and close all charge cards and cut up them up, so you won't be tempted to use them again because they charge you approximately 15 to 30% interest which equates to 15 to 30 cents on each dollar you have charged.
To work optimally, the method requires you to become disciplined. Those who are resolute and willing to sacrifice for their desire to be a godly steward of money the LORD entrusts to them will engage biblical financial principles that increase their giving and reasonable, fruitful living so they can continually experience the satisfaction of spreading the gospel of Jesus Christ at home and abroad. Such engagement will not leave you burned out, depleted, or in financial bondage. Instead it will take you to The Wealthy Place as you engage the work and ministry for which the LORD fashioned you.
Please pray for this ministry, email me with any questions, and contact me to speak at your business or ministry conference or workshop. May the LORD bless you richly as you follow His plan!
Deuteronomy 28:12-15, 43-45, Proverbs 22:7, Luke 16:8-9, Romans 13:8
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