credit and debt
the debt snowball
WSA adsense code -->
Heard of Dave Ramsey’s debt snowball? No? Well, let me explain it to you.
The idea is that you take all your non-mortgage debts (credit cards, car loans, personal loans, secured loans, etc.,) work out all the balances on them, and the minimum payments. Write them down in order of the smallest balance to the largest balance, and add up all the minimum payments.
Then, slash costs wherever possible to get an amount of money that you can afford to put each month towards paying off your debts that is larger than the total of all your minimum payments.
Every month pay the minimum on each debt, and put the extra towards the smallest debt.
Once the smallest debt is cleared, put all the money that you were paying towards that smallest debt, and use it to pay off the next smallest debt. Repeat until all your debt is gone.
As you pay off each debt, the amount of money over the minimum that you can put towards debt repayment snowballs - hence why it’s known as the debt snowball.
advantages
The biggest advantage of this is psychological. Any plan for getting out of debt where you cut costs and put the excess towards your debts will work if you stick to it. The key words there are stick to it.
The magic of the Dave Ramsey version is that if you tackle the smallest debt first, you’ll pay that off quite quickly which will give you the psychological boost you need to believe that it will work, and so stick to it. If you stick to it, you will get out of debt - as ably demonstrated by a reader of plonkee money and my fellow bloggers Ana @ debt-FREE revolution, NCN @ no credit needed and JD @ get rich slowly.
drawbacks
No great plan is without its downsides and Dave Ramsey’s debt snowball is no exception.
Paying off your debts in order of the smallest to largest without considering the interest rate on each loan means that you’re pretty likely to pay back more than you would if you paid then in the order of highest interest to lowest interest, which would be the most mathematically savvy route.
Now, I understand that actually paying off your debt is more important than trying to do it as cheaply as possible and giving up because the task seems insurmountable. But, it’s also a good idea to try and get out of debt as quickly as possible, and the less you’re going to pay the less time it will take.
a brainwave
Breaking things down into bite-size pieces and getting in some quick wins is a good idea.
What if you not only got the psychological boost, but also used some cunning thinking and a little bit of time to supercharge the debt snowball?
Come back tomorrow, and I’ll explain the idea 
.
Image by star5112.
Similar Posts:
If you like what you're reading, why not leave a comment below, subscribe to my feed, or check out some of my best posts.
Tags: Discussion
19 comments for “the debt snowball”
Post a comment
subscribe
use a reader
Hey Plonkee,
The snowball method of repaying is a good place to start if you’re snowed-under (ha!) in debt.
Here’s a useful calculator which may help people with their snowballing: http://www.whatsthecost.com/snowball.aspx?country=uk
I’m intreagued, I’ll be back!
I can see the psychological advantage, feeling like you’ve accomplished something. Those baby steps are what some people need, although like you say it may not make the most sense financially!
Ooh, do you have super powers? Will you be zapping the snowballs with the lightning that shoots from your eyes? fingers?
It snowed yesterday…
Apart from house, I don’t have any debts. Not much assets either though…
But in general the concept of achieving goals is a good one. If something is far away it is hard to stay focused, so I agree with the thinking behind getting rid of debts and having less on your mind, and a feeling of achievement.
Even though it is technically speaking cheaper, it is more likely you will stray from the path and end up paying more in the long run. You need tricks to keep control on your reactive part of the brain.
There is the additional potential problem though…
If you pay off the small debts first, you might be tempted to celebrate at this stage. This might then accentuate the larger debts. Better to celebrate after the larger debts are gone. Or not celebrate at all, but you need to feel good about achieving goals.
@Rob:
That calculator is good. Thanks for that.
@Mrs. Micah:
But I do have magic idea combining powers, and they are much better. After all if I had lighteningh shooting from my eyes, I might melt all the chocolate before I could eat it. That would be a travesty.
To my bitter disappointment, I do not have super powers.
@Llama for brains:
I don’t have many debts or assets either (apart from the house), but the assets are slowly but steadily increasing. Onwards and upwards is a good thing.
You raise an interesting point about intermediate celebration. I wonder if anyone has noticed that being a problem.
I love this way of working the debt snowball! We’ve managed to knock off four or five small debts since the first of the year, including a couple pesky medical bills that didn’t represent much money, but were constantly hounding us to settle up. It was nice to get them out of our life.
Excellent site, keep up the good work. I read a lot of blogs on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say I’m glad I found your blog. Thanks
===============
sophie
Excellent site, keep up the good work. I read a lot of blogs on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say I’m glad I found your blog. Thanks
But in general the concept of achieving goals is a good one. If something is far away it is hard to stay focused, so I agree with the thinking behind getting rid of debts and having less on your mind, and a feeling of achievement.
_____________________________________
Whiteblack
Every dark night is followed by a bright sunny day. So, patience and attention is required and things will be fruitful in near future…
Best Buy Finance
**********
kathy
I am very pleased with the thought and don’t feel like adding
anything in it. It a perfect answer.
———
Credit Cards
Credit Cards