Dumping Debt - part 2

The Debt Snowball

List your debts smallest to largest. That means, smallest balance to largest.

Pay only minimum payments on all but the smallest debt. Every single extra penny goes towards paying off that smallest debt.

Once that debt is gone, take its minimum payment and every extra penny and put it on the next one. Each debt you pay off gives you more "snow" for your snowball, and your monthly payments will get bigger and bigger and bigger.

It works, regardless of how small your snowball is to start out with. Our debt snowball started at $1.50. Yes, it was that pitiful, but it has grown into hundreds of dollars a month in 3 1/2 years. It is amazing how the debt snowball works!

Let's look at an example:

Item Payoff Min Pmt New Pmt
Target $210 $23
Visa 1 $798 $69 $92
Discover $2115 $98 $190
Car 1 $4899 $325 $515
Car 2 $12070 $405 $920
Student
Loans $22070 $425 $1345


I know what you're thinking....."but, but, but...wouldn't it be better to list them in order of highest interest rate? Wouldn't that be proper mathn?"

My response, "Honey, if you were so concerned about the math, you wouldn't be in debt in the first place." Why? Because if you are concerned with math, you'd know that paying interest on debt is stupid.

President J. Ruben Clark, in the 1938 General Conference Report said this about interest, "Interest never sleeps, nor sickens, nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its ways or cross its course, or fail to meet its demands, it crushes you."

So why do it this way?

It changes behavior! Remember that only 20% is math and 80% is behavior. By changing the behavior, you set yourself up to win with money. Working through your debts, making sacrifices, and being intense changes your behavior and the way you look at money.

Recently, I was interviewed for an online article I was featured in and she asked me if I would ever go back to my old ways once we’re completely debt free. After thinking for a moment, I could honestly answer. “No, I know too much, I’ve learned too much, and I’ve changed too much. I woke up and realized that I was living in bondage and that my money, wasn’t my money at all. I owed it to other people, and what I didn’t owe, I gave to others by over spending. Never again will I let that happen.” That is that paradime shift I was talking about earlier.

Another reason we do the debt snowball this way is that it gives you quick victories and instant gratification. It really does give you instant gratification to see these creditors go away forever. Once you knock the first one out and you get to say “goodbye forever” to them, then you will be pumped. You will feel a major rush every time you pay off a debt. If you were to do it any other way, chances are you’d get discouraged because you would not see instant results. When you see instant results, you are more likely to stick with it.

This plan and program has been proven time and time again to work. In the 3 1/2 years we've been doing the Dave Ramsey thing, I've seen so many couples get out of debt. Nearly every week I meet people who are screaming "We're debt FREEEEEE!!!" because they did this program. And one day in the near future (probably mid 2010) we too will be doing our debt free scream, because this plan works!

You may be asking, "But wouldn't debt CONsolidation be a good alternative?" No! And here's why:

Debt CONsolidation is a huge CON. They charge you money to move around the debt. You don't reduce the amount of money owed, you just owe on it longer - and actually you pay more interest since you're paying it over a longer period of time. The major reason to avoid it is that it doesn't change behavior. I have known so many people who consolidated their debts into one "manageable" payment, and their behaviors weren't changed. They felt some false freedom and ended up going further into debt again. So, not only did they have the original amount, they had twice as much as before because of the new debt.

The debt snowball changes behavior, and a behavioral change is necessary if you're going to win with money.

You do need to remember that all of this won't happen overnight. Dave Ramsey said, "I have been broke, I know how scared I felt, and know how fast I wanted to get out of debt. I know how you feel, and I have learned that what really works is unbelievably fierce, focused intensity."

If you make the changes you need to make, you will be amazed at how quickly you can get out of debt. We fully expected to be in debt for the next 30 years of our lives before we woke up and got a clue. It was normal to "always have a car payment" or those "emergency credit cards." But I have been constantly amazed at how much traction you can get in a short amount of time doing the debt snowball. Never would I have thought it would take 4 1/2 - 5 years to pay off 70,000 in debt, without drastically increasing our income. It's a program of intensity and quick victories which lead to winning the war. That's why it works.