Saturday, October 23, 2010

The Debt Snowball

Have you heard of Dave Ramsey? I love him. He had a real estate portfolio worth $4 million by the age of 26 but ended up losing it all by age 30. He’s since rebuilt his financial life, and teaches thousands of people how to successfully manage their personal finances on his radio talk show The Dave Ramsey Show.

My father-in-law gave all the girls in our family Financial Peace for Mother's Day. In his book, Dave outlines 7 "baby steps" to achieving financial peace. My favorite baby step is #2 The Debt Snowball. This is a great plan to help you visualize what you need and can do to get out of debt and do it quick. It's also called The Debt Elimination Calendar and the Church of Jesus Christ of Latter-day Saints has a great example in their pamphlet called One for the Money which my husband and I read together before we got married. It is an awesome free resource and full of good advice. You can download it here.

The Debt Snowball will help you reduce and eliminate your debt fast by applying the same amount of money each month to your debts even after some of them start getting paid off. To illustrate, list the names of the months down the left side of a columned paper. (I would recommend creating your Debt Snowball table in an Excel spreadsheet.) On the top of the next column, type the name of your debt with the smallest balance and the monthly payment underneath it on successive rows until it would be paid off. Next continue organizing your debts and their payments according to the smallest balance to the highest. Dave says we should start by paying off the one with the smallest balance and not necessarily the highest interest rate first because we will start to see results faster and want to keep with it.

Once your second debt payment gets to the payoff line of your first debt, stop. On the next line below the 2nd payment combine what you were paying towards your 1st debt to the payment of your second and that is your new monthly payment amount for debt #2. Continue with the following debts until they are all repaid. See example below.

The Debt Elimination Calendar
Credit Card   1Credit Card 2Credit Card 3
March5075100
April5075100
May5075100
June
125100
July
125100
August

225
September

225
Debt Free

You can see that you keep paying the same amount of money towards your debts month after month and that they start to get paid down quicker. I think a problem a lot of people run into is that they will pay off one debt and say to themselves "oh, now that I don't have that debt, I have X amount of extra money to spend a month" and they just spend it one unnecessary things instead of attacking the next debt with it. 

I also love the Debt Snowball because it gives you a clear picture to see that it's possible to get out of debt. It is so easy to get hopeless and feel like you will never see the end of the tunnel but with the Debt Snowball you know exactly how long it will take. 

This is such an easy thing people can do to help themselves learn to manage their money. I think the key word here is manage. Do you manage your money or does it manage you? This is the peace that Dave is talking about. I will be posting more tips and strategies to help you get control of your finances in the future. If there are any topics in particular that you're interested in let me know.

1 comment:

  1. Love it, Tar. Thanks for the reminder. Hope you are feeling better...

    ReplyDelete