‘Snowball Method’ to pay of debt | Nelspruit accounting

Note to our clients in Nelspruit: Even if you yourself are financially secure, please consider passing this article on to someone else who may be struggling with a debt burden – an employee perhaps, or a friend or relative.

Owing high amounts of debt and not being able to pay it off is one of the most demoralising things a person can experience. You feel you are dangling out of control as you watch your debt grow month on month. You know it’s unsustainable but what can you do?

If all else fails, try the “Snowball Method”

In the United States people with various types of debt like a mortgage, car rental agreements, some credit cards and, say, an unpaid hospital bill have started to pay off the smaller debts first. These smaller debts are usually credit cards where the interest rate is the highest. They pay off these credit debts one by one and then move to the next highest interest rate debt which is probably the medical bill which they systematically pay off – until just the motor car and mortgage bond are left.

For a Nelspruit accounting firm, this makes financial sense paying off the higher interest rate amounts first.

It is called the “snowball method” as by paying off the credit card debt, then moving to the medical owing, you start to build up a momentum of paying debt off. As you keep paying debt, so the reduction in your debt is likened unto a snowball rolling down a hill and getting bigger as it speeds up. Paying off debt thus becomes a habit and the feeling of helplessness progressively eases off. Not only is this good for your wallet but good for general morale.

Be careful, as not all indebted people are suited to the “snowball” concept. For example, if your credit card debt exceeds your mortgage, it doesn’t follow that you should pay the mortgage off first – remember the credit card interest rate is usually double that of the bond.

Our South African situation 

Consumer debt to disposable income stands at just below 73%. This means that only 27% of net income (the amount of salary after income tax) is not spent on paying debt. This is growing over time (the prior year’s figure was 72%). This greatly increases the risk that consumers are facing debt restructuring or insolvency – hence the feeling of helplessness alluded to above. The consumer is also more at risk when interest rates rise which is a highly likely outcome if Moody’s put South African debt on junk status.

As 60% of the South African economy is dependent on consumer spending, this partly explains the low growth situation the country currently is experiencing. We as a Nelspruit accounting firm see this often based here in Mpumalanga.

If you are an employer in the province of Mpumalanga, why not encourage any staff members who are heavily in debt to look at the “snowball method”? Lifting the cloud under which many South Africans operate will improve their peace of mind and help put the economy back on a growth path. It will assist employees and makes sound business sense all round. Your accountant can help facilitate in need.

BVK Financial is a Nelspruit accounting firm based in the heart of Nelspruit. We specialise in accounting for businesses and help you with the big decisions. Make contact with us today and let’s help shape your business’s financial future

orig article by DN