I have a 5 year old, a 3 year old, and a 1 year old in my home. They are constantly in motion, dropping things as they go… particularly food. Consequently, vacuuming is a dire need in my house. However, since every second step you have to stop to pick up a toy, vacuuming is a monumental task. I’ve tried getting the whole house tidy and then vacuuming, but without Matt’s help, that rarely works. Now when Daddy is home, he occupies the culprits, and tidies and I vacuum and so we get it done. However, it always feels like this huge endeavor and so as I clean my home I always leave vacuuming for last. However, lately this has just meant that it has been way too long since I vacuumed. So yesterday, I began with vacuuming. I had a chunk of time, everyone was awake, so I just dived in there and vacuumed. It took me about 45 minutes, but I was so incredibly relieved to have done the monumental. The small stuff can be squeezed in, but the really time consuming tasks have to be done in blocks of time. How in the world does this relate to your credit cards? So glad you asked 🙂
If all you have is small amount of money to put towards your debt, then snowballing is absolutely the way to go. As you make your money work for you, you will get a tremendous feeling of success and accomplishment as you are able to cancel cards as they are paid off. However, if you are in a position to put a large amount of money towards your debt, which card should you pay off? Do you pay off the little ones, or the big one? Do you pay off the one with the highest interest rate, or does it matter? If you are in a position to put a chunk of money towards your debt, you need to look at two factors. First of all, what would make the largest impact on your mental attitude towards your debt? In other words, where will you feel the greatest sense of victory? The second factor is, where can you make your money work the most by paying the least amount of interest?
Your interest rate is important because if you have a card with a 28% interest rate vs a card with a 12% it could end up costing you hundreds of dollars more in interest if you wait to pay it off. It needs to be considered into the equation. If you have two cards with similar balances, you definitely need to pay the one with the highest interest rate off first. However, you cannot underestimate the power of accomplishment when it comes to debt. It lifts your heart, and helps you to keep pressing forward. That is why I say if you only have a little, put it towards your smallest amount, because for me, sometimes just getting my toilets cleaned can motivate me to keep going and clean my bathroom, my bedroom and my whole house. But if you have a large influx of resources, where do you start?
In my opinion, you need to kill the giant first. Whatever seems the hardest and the heaviest. If you have the ability to get rid of it, do it. It will make the journey seem so light. So for an example, let’s look at our illustration from yesterday. If you have debt of $4,000 and $2,000 and $1,200 and $500 all on different cards and you get a tax return back of say $4,700, what should you do? I would take into consideration which card has the highest interest rate, because interest is just the creditor gobbling up your money, but kill the giant. Most likely it will free up the largest amount of money, in terms of minimum payment, that you can then put towards paying off the smallest amount. But being free of the giant will make all of the other debts seem conquerable. Just like vacuuming for me, once I get it out of the way, the rest of the house seems so manageable and easy. However, if you can’t completely kill the giant with the lump sum, then go back to the snowballing plan. Let’s say you get a $2500 bonus at work and you decide to put it towards your debt. Well, first of all, always pay yourself first, so put $250 in savings, ask the Lord what to give, and then pay off the $500 card and the $1200 card and put the rest towards the $2,000 card. This will free up the minimum payments from two cards for you to put towards the principle of the third. You will still conquer your giant at the end, you are just doing it with a snowball, rather than with the “hail from heaven”
So just to recap, if you are starting with just what you have in your budget to put towards your debt, then snowballing is totally the way to go. Work towards paying off the smallest balance and go from there. However, if you can kill the giant in one big blow, then go for it. Unfortunately for me, my vacuuming giant resurrects itself each new day with the joyful mess of my children, but hopefully for you, when your giant dies you will never see it again. If you can embrace budgeting and savings and get a vision for your future, it is my belief that you will never face this mountain of debt again. I truly wish I could say the same thing about vacuuming.