plonkee money

April 17, 2008

the debt snowball

Filed under: credit and debt — Tags: , , , — plonkee @ 12:00 pm

big snowball

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.

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One comment on “the debt snowball

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