After another season of fighting mall traffic or receiving a
seemingly endless string of deliveries from online stores, many people are now
experiencing that holiday hangover!
Of course I’m not referring those bottles of wine you drank – I’m
referring the credit card bills. One of
the most popular searches at this time of year is relates to credit cards. Last
January, the top 5 financial companies searched were the major credit card
companies.
I want to suggest a strategy that is quite popular with experts and
celebrity not-so-experts alike. Debt stacking. Sometimes known as debt
snowball or debt avalanche. The basic principle is this:
- List out all of your debts in some order, such as smallest balance or highest interest rate
- Add up all of the extra payments you make on each. That is, how much money you pay beyond the minimum payment on each debt.
- Take that extra amount and apply it to the first debt in whatever order you picked while paying the minimum on all of the other debts.
- When the first debt is paid off, take all of the extra money that was being applied plus the minimum payment on the first debt and apply it as extra on the 2nd debt.
- Repeat as each debt is paid off.
Basically, you stack payments from the paid off debts onto the next
debt and so on. This helps you pay off debt very quickly.
Why this works:
You accelerate payments on debt in a concentrated fashion.
Yes while some of the debt is only getting minimum payments, as you
progress, you really start to accelerate pay off.
It’s really good discipline.
Doing this takes discipline to apply the payments, and then move
the extra to the next debt and so on. And this will help you focus more on your
finances overall – in a good way.
Why this doesn’t work:
This takes a LOT of
discipline.
Because you really have to know your finances and how much you’re
paying and when, it can be tough for people to keep track over the long term.yo
And you don’t get any rewards.
Yes, some people get a thrill from just paying something off, but
this becomes harder. As you pay off debt, you expect some cash flow relief. Not
in this strategy because you’re always applying money to the next debt so your
total monthly debt payments don’t go down until everything is paid off – which
could be years from now.
You’re more likely to get back into debt.
Chances are, you’re throwing all of this money at debt but not
saving any money. When the holidays roll around again, or have a big expense
like an auto repair, you won’t have savings to rely on. You’ll have to use the
credit cards again.
Overall, debt stacking can help you get out of debt faster, and
objectively it does work. Just be aware of the reasons why it won’t work and
those have everything to do with what is in between your own ears.
