When it comes to debt elimination, many people turn to the debt snowball method made popular by financial guru Dave Ramsey.
Snowball Method
The Snowball Method is a debt repayment strategy where one starts by paying off the smallest debt first while making minimum payments on other debts. Once the smallest debt is paid off, the amount that was being paid towards that debt is then added to the payment being made on the next smallest debt, creating a “snowball” effect. As each debt is paid off, more and more money becomes available to pay off larger debts until all debts have been paid off.
While this method can be effective in quickly eliminating small debts, it may not be the best approach for long-term financial success. That’s where 101 Financial’s approach to debt elimination stands out.
Unlike the debt snowball method, which focuses on paying off debts in order of smallest to largest balance regardless of interest rate, 101 Financial’s approach prioritizes paying off debts with the highest interest rates first. By tackling high-interest debt first, you can save money and time in the long run and achieve debt freedom more quickly.
It’s Just Math
Mathematically, one can pay off debt faster with the 101 approach to debt repayment than the standard debt snowball approach. Paying off a debt with the largest interest debt first, even if it has a high balance, will save you time and money overall, because of how daily compounded interest rates work.
Daily compounded interest is a method of calculating the interest on a loan or investment where interest is calculated and added to the balance on a daily basis. This means that each day, the interest for that day is calculated based on the current balance of the loan or investment, and then added to the total balance. The next day, the interest is calculated again based on the new balance, and so on. This results in a compounding effect where the interest earned or charged increases over time. Daily compounding is a common method used by banks and financial institutions for savings accounts, certificates of deposit (CDs), and loans. It is typically considered more favorable to the account holder or borrower than simple interest, where interest is only calculated on the initial principal balance.
A Method Versus A System
Additionally, 101 Financial’s approach is centered around a comprehensive financial plan that takes into account your entire financial picture, including income, expenses, savings, investments, and debt, including a mortgage. We work with you to create a personalized plan that not only eliminates debt but also sets you on the path to long-term financial success.
Our approach to debt elimination also emphasizes building a strong financial foundation, including establishing an emergency fund and saving for retirement. This ensures that you’re not only eliminating debt but also setting yourself up for future financial stability.
How the debt snowball method works
Step 1: List your liabilities/debts from smallest to largest balance (regardless of the interest rate.)
Step 2: Make minimum payments on your debts except the smallest “target” debt.
Step 3: Pay as much as you can on your smallest debt.
Step 4: As you pay off one debt, use the money you would have spent making the monthly payment on the next target debt. Keep doing that until all debts are repaid.
How the 101 Financial System works
The 101 Financial system is a comprehensive personal finance system that:
- Improves cash flow by optimizing budgeting and building financial road maps
- Builds and manages credit
- Utilizes smart banking with a Debt Checking Account
- Provides personalized coaching to help you every step of the way
- AND applies innovative debt repayment strategies
Overall, while the debt snowball method may work for some people in the short term, it may not be the best approach for long-term financial success. 101 Financial’s approach to debt elimination, which prioritizes high-interest debt, focuses on a comprehensive financial plan, and builds a strong financial foundation, can help you achieve debt freedom and secure a bright financial future. Contact us today to learn more about our approach and how we can help you achieve your financial goals.
