Create a Debt Snowball - On Purpose!!!

May 20th, 2007 categories: El Dorado County Real Estate, Mortgage & Finance

Create_a_debt_snowballWhen it comes to constructing a successful plan for paying off your debts, Dave Ramsey, author of “Total Money Makeover”, charts an entirely different course than most financial pundits and counselors. Ramsey calls his method of the “Debt Snowball.”

It is an integral part of his “Baby Steps” routine for complete financial fitness. “This is the toughest of all the Baby Steps,” he writes. “It is so hard, but it is so worth it.” Rather than attack debts in order of interest rate - say, from highest rate to lowest - Ramsey suggests that his clients pay off their debs in order of smallest balance to largest balance.

This excludes your home mortgage, as well as any similar real-estate or business loans which total more than 50 percent of your annual income. If more than one loan or debt have similar balances, list the highest-rate debt first. At that point,then, you round up your money and start with the first debt on your list. Pay the minimums on all debts except the first, and keep them current. Throw every cent of money you can at your smallest-balance debt. When that is gone, you then “snowball” (add) that debt’s payment into your monthly payment for the next debt on your list. Quote2

“The Debt Snowball is designed the way it is,” Ramsey writes in “Total Money Makeover”, “because we are more concerned with modifying behavior than correct mathematics. Sometimes motivation is more mportant than math. This is one of those times.” The bright idea here is to get some “quick wins.”

The payoff is twofold. For one thing, human nature is such that we tend to bog down on tasks, or quit them all together, if we cannot see ourselves making progress toward the goal. That isn’t the problem here: You write down all your debts, and you see yourself making quick progress - swatting away your smallest debts like the nuisances they are. Many people magnet their Debt Snowball charts to their refrigerators so they can continually see how far they’ve come.

“I don’t care if you have a master’s degree in psychology,” Ramsey says. “you need quick wins to get fired up. And getting fired up is super-important.” Additionally, the quicker you pay off a debt - any debt - the quicker you can snowball (add) its payment to the next debt on your list. Your debt payments therefore “compound” upon themselves as you slice through your debts, one by one. ” All the money from old debts and all the money you can find anywhere goes on the smallest debt until it is gone,” advices Ramsey.

“Every time the Snowball rolls over, it picks up more snow and gets larger, until by the time you get to the bottom, you have an avalanche.” And in this case, an avalanche is exactly what you want to see coming your way.

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This entry was posted on Sunday, May 20th, 2007 at 10:24 am and is filed under El Dorado County Real Estate, Mortgage & Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

  1. Chris Lengquist said at August 13th, 2007 at 3:41 pm

    Dave’s process is nothing new. I heard it twenty years ago and applied it. The trick is in applying it. I do disagree with his live 100% debt free stance. Investment properties and my primary home mortgages are “good debt”. Yes, I’d rather be 100% debt free. But really I’d rather get cash flow from 4 houses plus appreciation that the 3% interest I might get in savings.

    I like the look of the blog, by the way!

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