The Debt Snowball
There are so many ways you can pay off your debt. Of all the methods out there, the one I like the most is the one Dave Ramsey teaches. The debt snowball is the second baby step in the Total Money Makeover. You generally start your debt snowball once you have saved AT LEAST $1,000 for your baby emergency fund. The idea is to give yourself a buffer so that as you are paying off your debt, you will be able to handle life’s little problems without having to borrow money in the process.
Dave’s Snowball method is awesome, but I have come up with a few revisions for special circumstances to give you more options. My revision allows you to attack your debt in a different way, giving you the opportunity to choose paying off higher interest bearing accounts first or to just pay off larger amounts before the smaller ones. Please pay attention to the special circumstances for doing it this way. For those of you that are not familiar with the debt snowball, I have provided you with an example with my revisions directly below it.
Dave’s Debt Snowball Method
List ALL of your debts, EXCEPT your mortgage, in order of smallest to largest. You would also list your minimum monthly payments for each of those debts. You want to make sure you pay ONLY the minimums for each debt on your list. You would then take your disposable income, plus any other money that you can round up throughout the month, and apply it to the first debt on your list.
- 1. Visa – $589 ($50 min. pymt)
- 2. Discover – $620 ($55 min. pymt)
- 3. Lowe’s – $819 ($75 min. pymt)
- 4. Mastercard – $1,255 ($100 min. pymt)
- 5. Student Loan 1 – $5,000 ($65 min. pymt)
- 6. Student Loan 2 – $8,500 ($90 min. pymt)
- 7. Student Loan 3 – $12,500 ($125 in. pymt)
- 8. HELOC – $20,000 ($225 min. pymt)
TOTAL DEBT: $49,283
TOTAL MIN. PYMTS: $785
DISPOSABLE INCOME: $250 (money left over after paying all the bills)
For the first month you would apply the $250 from your disposable income PLUS your $50 minimum payment to your Visa bill, while paying JUST the minimums on everything else. You would kill $300 off of your Visa debt and be able to knock out the rest in the following month. (*If you have a yard sale, or put some stuff on craigslist or Ebay, you could probably come up with enough to knock out the Visa debt in the first month.)
Some people have a problem with this method because of the fact that you don’t organize your list according to interest rates. You can certainly do it any way you want, but the idea behind this method is that you earn some quick wins by paying off your smallest debts first. Imagine if your highest interest rate was also your largest debt. You probably would save a few bucks by paying it off faster but it would also take you much longer to pay it off, which could cause you to feel like you aren’t accomplishing anything. Doing it the other way keeps you motivated and focused on killing your debt.
DO NOT underestimate the motivation you get by paying off each debt in your snowball faster! It was huge in keeping us focused and happy while killing our debt. A great example of this for us, is the fact that we have had our last and final debt hanging around since September of 2008. (About $8500) It feels like it is taking forever and there have been times where our motivation has been low. It’s not always about math! Dave Ramsey would remind you that if you were doing good math, you wouldn’t be in debt in the first place. I certainly agree! For the record, I was lousy at math in that respect, for much of my adult life!
My Revision To Dave Ramsey’s Debt Snowball
Now my revision doesn’t really change the debt snowball unless you come into a large amount of money. For instance if you receive a large monetary gift from family, an inheritance, or you gave Washington an interest free loan and received a large tax refund, you would apply that money to your snowball in a different way.
Let’s just say that you received a $13,000 inheritance. Instead of paying the first four debts off completely and paying down the fifth one by $4,717, I think that you have a few more options. My revision basically consists of paying off ANY of the debts in your snowball any way you want as long as you can pay the debt(s) off completely. You will still be gaining those quick wins and knocking out some major enemies on your snowball in the process. Knocking out a huge debt, even if it is only one, can make you feel pretty good, especially if it means you will save some money in the process. Also adding some money to your disposable income to attack your snowball by knocking out a debt with a high minimum payment can be very helpful to your mission!
- Option One: Take the $13,000 and pay off debt number seven from the list above. Then you would apply the remaining $500 to debt number one. With your minimum payment saved from paying off #7, you have an extra $125. That would help pay off your Visa debt completely and give you some extra to start putting Discover out of your misery.
- Option Two: Pick the highest interest account, and if you can pay it off COMPLETELY, do it! What if you could pay off two of your highest interest debts with that $13,000?
- Option Three: Dave Ramsey’s method. There is absolutely nothing wrong with doing it this way. We did it this way and it worked GREAT!
YOU DECIDE, depending on what makes you feel better! My revision allows you to feel good about paying off your debt while still experiencing the extra incentive and boost from gaining some much needed wins along the way! In order to do this you have to be able to pay off any combination that you choose completely! Remember that and good luck paying off that ugly debt!!
When you take the enemy out of your life, life is better! Stop borrowing money and decide right here, right now, to get that debt out of your life! It will change things dramatically! Try it and see for yourself, you can always go back to borrowing money if it doesn’t! Lose some debt and gain some freedom!