Ok, it’s been a few days since my last post – work has been hectic and projects at home just kept piling up! Things have calmed down a bit now, so let’s take a look at the plan that I am using to pay down my debt as quickly as possible.
It’s no big secret or magic formula. I’m sure that probably 98% of people reading this time of blog already know a lot about it, and about the person that’s credited with popularizing the method. If you’re not familiar, let me introduce you to a very intelligent man named Dave Ramsey. Google him and you’ll find tons of sites discussing financial planning and strategies to accomplish your financial goals. I’ve listened to his pod casts and watched plenty of his videos on YouTube and what he says always make sense to me. Ramsey is a no nonsense guy that will absolutely tell it like it is – we got ourselves into these situations by making too many dumb decisions. Yes, there are folks that have tons of debt through no true fault of their own – medical expenses being the best example. But for the majority of us we made the decision to open those credit card accounts, max them all to the hilt and then complain when we have too much debt to manage.
When you do search for Dave Ramsey online you’ll invariably find plenty of websites talking about “The Snowball Method” and how powerful it can be for paying down debts. And at the same time, you get some morale boosters as you see more and more accounts with a zero balance – a win-win. So how does it work?
If you’re like me, you’re already paying minimums on cards where a balance is carried. The concept of the snowball is simple… remember as a kid playing in the snow? If you didn’t have snow where you live, well, you’re missing out! But seriously, imagine being at the top of a big hill (the debt mountain in the case) and taking a small snowball and start it rolling down the slope. As the snowball progresses further down the hill it gets larger and larger, picking up more snow as it rolls. By the time it gets to the bottom of the hill it has grown massive and is moving at a furious pace, right?
The debt snowball works the same way. You pick the debt that you want to knock out first. You scrape up every extra available dollar that you can to dedicate to paying MORE than the minimum on THAT ONE ACCOUNT. You continue to throw all you can at the first debt, while continuing to make the minimum payment on all others. Once the first debt is zeroed out, you take the amount you had been paying towards account one, and apply that to account two PLUS the minimum you’ve already been paying all along. Continue with the same plan account by account and over time, the monthly payment you’re making to your “target” account grows (bigger snowball) and the balances shrink faster and faster (furious pace).
Let’s look at an actual example that’s in my plan:
The first target that I’m paying off is a department store card that had a relatively small balance compared to some others I carry right now. The balance started at $300, with a suggest minimum payment of $27. After fine tuning our budget, my wife and I decided we could easily dedicate $122 extra dollars to that minimum, making our monthly payment $149.
Our first “snowball” payment was made earlier this month, we paid $149 and now have a balance of roughly $152 once monthly interest was added in. I’ve already scheduled next months payment to pay the balance in full (we can afford an additional $3 😊), leaving us with a ZERO balance on that account! So, we’ve paid off our first card in two months! Remember we talked previously about the credit card company rubbing it in our faces and telling us how long it would take to pay that debt off if only making minimum payments? For this card, if only making minimum payments, the estimated time to pay off the entire debt was 11 months. What’s better – 2 or 11? The answer in this case is a no brainer.
And here’s where the morale boost comes in – it feels good to know we’re making REAL progress, and seeing that first ZERO balance is inspirational. It gives you the desire to knock out the 2nd, then the 3rd, and so on, right? It certainly does for me.
The snowball concept becomes even more apparent as you move through your accounts. After next month’s payment to the department store card we will take that $149 and start applying it to our next debt. Our second target is a payment for some car parts that I ordered and financed online. Minimum payment for that account is currently $37.25, which would be paid completely in 12 months at that payment level. Instead of paying the minimum, we will pay $186.25 ($37.25minimum + $149snowball). That will pay off the next debt in 2 months as well. Our third account will have its current minimum ($35) increased when it’s time to $221.25 and on we go!
Sounds simple right? I certainly hope so. Using the plan and sticking to it (and most importantly ADDING NO MORE DEBT) will enable my family to erase $35K in debt in just over three years. I know it is absolutely certain that there will be bumps in the road and unexpected expenses do come up, but just remember if you fall off the track, get back on it ASAP.
I’ll try to update weekly as to how things are progressing and would love to hear your input on the plan, or any other tips/tricks you’ve found that work for you!