If you’ve been around here long, you know I want you out of debt. I don’t want you to reduce your debt – I want it gone. And we’re not talking about “eventually,” but ASAP. You also probably know I’m a huge Dave Ramsey fan. The man is a no-nonsense debt assassin. He keeps it simple and to the point so you can get started immediately on what he says to do. While I disagree with him on a few minor points, one where I am in lockstep with him is his advice to use the debt snowball. Today I’ll talk about why that’s the best and fastest way to get out of debt.
What is the Debt Snowball
Simply put, you organize all your debts including mortgage and personal loans, from smallest to largest, based on the total balance of each debt. Ignoring interest rates and almost everything else about the debts, you pay minimums on all bills except the smallest one. On the smallest debt, you put every extra penny you can scrape together to KILL it. Dave explains it a little differently in an article on his website, but I think you get the idea.
Why the Debt Snowball
Getting out of debt starts with having the right mindset about debt. If you’re one of these people who believe the argument that, “you’ll always have debt,” or, “a little debt is okay – you can manage it,” you’re not ready for this discussion. However, if you’re sick and tired of going to work every day just to pay bills you wish would just go away, you’re in the right place to fix this mess.
Imagine something with me: There are a bunch of bad guys coming at you in a dark alley and you can’t run away. Which one do you take out first? I’d just about bet you will focus on getting rid of the easiest target first. Your debts are those “bad guys.” With each bad guy that falls, you have less to worry about and the odds of surviving this fight tip more and more in your favor. Eventually, it is just you and one or two big, scary dudes. But hey, by that time you’ve beat a bunch of little guys, so you’ve gained confidence that you can do this!
What About Math?
Again stealing from Dave, if you were making your choices about debt based on math, you probably wouldn’t have gotten into debt in the first place. I understand there are probably many of you that know much more about the intricacies of math than I ever will, but can’t seem to pay off your student loans or credit cards. So instead of arguing the math, let’s focus on the root problem – behavior. No matter what got you into the debt (poor choices or bad circumstances), fixing this issue boils down to very simple math + very focused behavior.
Even though it doesn’t make mathematical sense, the debt snowball is the best method of paying off debt. Why? Thinking back to our “bad guys in a dark alley” example, the little guys will fall a lot faster than the big guys. And once they’re down, you never have to deal with them again. Looking at 20 bills and seeing each month that they all were a little smaller is all well and good, but how about looking at 20 bills this month, 19 next month, 17 the month after that, and 14 the month thereafter? That looks a lot better to me than only seeing balances shrink.
With all the complexities life has to offer, let’s keep paying off debt as simple as possible. Let’s remember our goal is to get OUT of debt, not to reduce it. The debt snowball is so simple, and yet it works.
Have you used the Debt Snowball?
We just used half of our tax return to pay off one of our cars and also traded in a newer van for an older van (with less miles!!) for half the loan amount so we can pay it off twice as fast! We are on our way!
Agree wholeheartedly. I teach my children about this often. Can’t wait to have our house paid for by the time our kids start college. Nice to meet you, Barry! 🙂
Hi Stacy, I found your blog through Angela’s Grocery Shrink. I read about Dave Ramsey when I was reading finance article on Yahoo! and a reader commented about him, so I searched his name on google and read something about him and visited his website and know about “debt snowball”, at first, I was hesitant because a lot of finance guru say it’s not advisable for your credit score’s sake, but he makes sense, if you knock out the small ones, you’re ready for the big ones. And we’re doing this because we don’t want debts anymore!
As Dave would say, “Debt is Normal…Be Weird!”
We just used our tax return to buy an oven (which was badly needed as my oven went ka put, and they no longer made the part for it.) NO PAYMENTS! I had car trouble, and husband went and got the car part and put it in by himself (saving us money). Then, I have my medical bills down to $500 from almost $3,000 six years ago. 🙂 We’re getting there. Whoo hoo!
I’ve started chores with my son, and once a month if he’s good with his chores, we go out for a treat (Sonic runs or some other neat place.) This has completely stopped our running through drive thrus. Money saved! We use these trips once a month now, rather than several times a week. 🙂 I’m learning something Stacy. Your hard work is teaching us a whole lot! Thank you!
Keep it up, Wendy! Sounds like you’re doing great!
We are actually starting this month!! Thank you for this post. I needed the encouragement. I am curious though on the minor points that you disagree on with Dave’s plan. If you don’t mind sharing that.
The biggest thing for those just starting on their journey where Dave and I differ is the amount of mini-emergency fund someone should start with. He says $1,000. I counsel way too many people who make very little or a whole lot and that number is sometimes not a good way to look at it. I recommend the amount of one paycheck. Why? Two reasons: 1) this ties your mini emergency fund to your income and expenses level better than a static number and 2) it helps break the all-too-common cycle of living paycheck to paycheck. If you want more details on where we differ, you should check out my book: http://www.debtortobetter.com/the-book/
one weekly paycheck? one paycheck that comes every 2 weeks? One monthly paycheck? I only ask cause people get paid differently, so unsure what you are counting as one paycheck.
Good question. I say one paycheck, no matter how often you get paid. In a perfect world, I’d say at least two weeks’ worth of pay in savings is a minimum start, but a single paycheck, no matter how frequently your paid is fine because the primary goal is to break the cycle of being dependent on the very next check. It is less about the amount and more about making sure you have money tucked away in case something goes wrong so you won’t be desperate for the next payday.
I’ll let Barry chime in on this one.
Another bonus is that as you get further ahead on your debt the minimum monthly payment goes down so you are putting more towards the principal each month. Depending on your servicer too, the due date is extended for your payment. I like that because if I DID run into trouble like job loss and loss of emergency fund, the loan wouldn’t get me in trouble. Yes interest would continue to build up but I wouldn’t be charged with a late payment.
This is why I periodically review my actual billing statements to see if I can build up the snowball faster. We also use my husband’s year-end bonus for paying down debt.
Excellent points! That is something not a lot of folks are aware of is that due dates aren’t always the same. I know Citigroup went to a system using the “business day of the month” instead of a regular day each month. It threw a bunch of customers off but can be used to your benefit if you pay attention! Thanks for adding this idea.
It also can move months ahead. I managed to pay a lot of my school loan ‘ahead’ before I was married and had a car and all that, so my next payment isn’t technically due til some time in 2016!
We finally started our debt snowball in February!! After paying off our van we actually have the money to snowball! We’re so excited! Pray for us please as (obviously) we’ve never been good at this!
I stay at home and homeschool our five boys so it’s hard for me to find a way to make extra money. But I have a friend who needs to get a job for a few months so I might be babysitting for her…which means snowballing faster!! Yeah! 🙂