Saturday, January 26, 2008


My Dollar Plan has a nice post up about applying the snowflaking strategy for debt reduction to investing. Snowflaking is a corollary of snowballing. With debt snowballing, instead of paying off the debt with the highest interest rate first (which is the mathematically and financially correct way to do it), one attacks the debt with the smallest balance first. Pay the minimum on the other debts and put everything extra toward the smallest balance. Once that is paid off, apply whatever monthly payment one would have made toward that to the next smallest balance. Instead of following the most financially sound path, this method appeals to psychology, allowing the debtor to quickly win victories, keeping morale up and staying on track until the entirety of the debt is paid.

This method has gotten many positive reviews across the financial Blogosphere, and I think that if it does help people stay on task until they pay off all their debt then it is worth the extra they will pay in interest over the course of repayment.

Using snowflaking for investing is a great idea, I think. Any little bit here and there over the course of a month - stick that in your savings, or use it to help max out your IRA contribution for the year - will add up into an investment snowball, eventually creating a veritable avalanche of wealth for you as you sit by the pool sipping on fruity drinks in your golden years.

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