What is a debt snowball?
Is it something that could help you reach your financial goals?
The debt snowball is a method of debt elimination credited to financial guru Dave Ramsey. It is mentioned in his book The Total Money Makeover, and there’s tons of free information online as well (see my resources section at the end of this post).
If Dave Ramsey was in charge in my household (he’s not, but more on that later), he would list my current debts from smallest to biggest. Everything except the mortgage, which you will get to that later in baby step # 6 if you are following his plan. You ignore interest rates of your debts, unless two debts are the same amount. In that case you’d list the highest interest rate debt first.
Once you have your list, you pay minimum payments on all of the debts except the smallest. The smallest debt you attack with everything you’ve got (minimum payment plus every extra dollar), until it’s gone! Then you take the money you were paying on debt #1 and start attacking debt #2 with everything you’ve got! Repeat until you are out of debt.
You’re supposed to get a great feeling of accomplishment from quickly smashing your smallest debt and then build momentum as your snowball grows, crushing the rest of your debt. Make sense? Here’s our debt snowball, according to Dave:
Debt List: Smallest to Biggest
(*note, the numbers used in this example are from 12/25/15. I will update on our progress and give fresh numbers in my next money post!)
$848 owed on Cell Phones ($70 payment, as part of our cell phone bill)
$978 owed to Medical Debt #1 ($100 payment)
$1,202.24 owed to Credit Card #1 ($0 payment due to no interest/no payment promotion)
$2,024.16 owed to Credit Card #2 ($68 payment)
$2,623.65 owed to Medical Debt #2 ($188 payment)
$2,724.06 owed to Credit Card #3 ($105 payment)
$5,278.64 owed to Medical Debt #3 ($145 payment)
$8,645.78 owed to Credit Card #4 ($220 payment)
$17,619.57 owed on Car Lease ($275 payment)
$31,070.91 owed on Car Loan ($497 payment)
The debt snowball works by rolling payments together, so you are always attacking your debt with as much money as possible. For example, the minimum monthly payment for our lowest medical debt is $100 per month. Once that is paid off, we don’t get an extra $100 to put back in our budget. Instead, we would add the $100 to the $188 minimum payment to medical debt #2 (making a $288 payment), until that debt is paid off. Keep building your snowball bigger and bigger, focusing on attacking on debt at a time, until you are completely debt free (expect for the house)!
Goals, Priorities, Compromise
If you read How I’m Getting Financially Fit in 2016, you know my #1 goal was to set up a $1,000 baby emergency fund (Dave’s baby step #1). Paying off debt via a debt snowball was actually #3 on my goals list! (read the post if you’re curious to find out what goal #2 was!)
You may also know, after reading Why My Financial Plan is Going to Fail, that my husband didn’t agree with my plan! His goals are different and we are compromising. Reaching financial goals together can be tricky, as I’m learning as I explore our individual money stories.
If you were wondering how our plan might change, here is what we are going to do:
Debt payoff will be our number one priority (before an emergency fund). And when it comes to the debt payoff, we are not going to be following Dave’s debt snowball guidelines exactly.
We have agreed that the cell phone debt is the least important debt to tackle. The payments are painlessly rolled into our monthly bill and we don’t have an urgency to pay it off. We do feel an urgency to get out from under all of our medical debt from our second son’s birth almost a year ago. So our debt snowball will list the medical debts from smaller to largest first. Our next priority is definitely credit card debt, so add those to the list in order from smallest to largest. Finally, throw in the two cars (one lease, one loan), and then the cell phone debt at the end.
Our Re-Prioritized Debt Snowball
$978 owed to Medical Debt #1 ($100 payment)
$2,623.65 owed to Medical Debt #2 ($188 payment)
$5,278.64 owed to Medical Debt #3 ($145 payment)
$1,202.24 owed to Credit Card #1 ($0 payment)
$2,024.16 owed to Credit Card #2 ($68 payment)
$2,724.06 owed to Credit Card #3 ($105 payment)
$8,645.78 owed to Credit Card #4 ($220 payment)
$17,619.57 owed on Car Lease ($275 payment)
$31,070.91 owed on Car Loan ($497 payment)
$848 owed on Cell Phones ($70 payment)
I thought it was interesting that the first priority debt (medical debt #1) is almost the same amount as my previous #1 goal of a $1,000 baby emergency. Instead of $1,000 saved ASAP, I will have $1,000 of debt paid off ASAP. I’ll take it! I have been VERY motivated to get this ball rolling and eliminate our first debt, so stay tuned for an update soon!
Would An Avalanche Be Better?
The debt avalanche is an alternative method of debt elimination. I have spent less time researching the avalanche in comparison to the debt snowball, but I’ll share what I have learned. The concept is fairly similar except for the order in which you pay off your debts. For an avalanche you list your debts by interest rate (and this time you include your mortgage!). Highest interest rate to lowest interest rate. And then you begin paying off your debt, as you did in the debt snowball, by attacking your highest interest rate debt first. Proponents of this method claim it will get you out of debt faster and for less money.
I believe the debt snowball is the right choice for my husband and I. We need the quick wins to help us stay motivated and avoid debt fatigue.
Resources
If you need more information, these articles might be helpful:
How the Debt Snowball Method Works by Dave Ramsey
The 7 Baby Steps by Dave Ramsey
The Correct Way to Pay Off Personal Debt: The Debt Avalanche by Consumerism Commentary
Debt Snowball vs. Debt Avalanche – How to Pay Off Your Debt by Credit Karma
Have you used the debt snowball method? Would you consider it?
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