Going to apply the Dave Ramsey “Debt Snowball Plan”

By Stew

Last week I mentioned that I have finished paying off my college student loan debt. My next task is to figure out which debt to tackle next.

There are several different strategies to employ when deciding how to best pay down family debt. One is the Dave Ramsey “Snowball”. Dave explains the idea here. Basically, a person considers all of his particular debts, determines how much extra principle he can pay on one of those debts and then focuses all extra money on that one debt. Meanwhile, he continues to make the minimum payments on every other debt. Once the smallest remaining balance is erased, he takes whatever monthly payment he was making on that particular debt and adds it to the minimum payment that he is making on the next smallest remaining debt.

For instance, my school loan payment was $65 per month. Now that I have stamped “paid in full” on that note, we have an extra or unallocated $65 per month remaining in our budget. I will take that $65 and apply it to the monthly payment that I am currently making our smallest remaining household debt which happens to be our car loan. If we are disciplined, we should be able to make a payment of around $375 per month until our car loan is “paid in full”. After that, we will take that payment and hit the remainder of our HELOC and eventually Mrs. Stew’s college loans. Ramsey calls this strategy the Debt Snowball. I was once involved with a debt counseling program that referred to the extra money found in your budget that you use to pay down principle as a debt “accelerator”. The debt accelerator can be as small at a couple of bucks or as large as you can spare once you have taken care of your other budget priorities.

Five Cent Nickel once pointed out that Ramsey’s debt snowball method might not be the absolute best from a mathematical standpoint, however Dave himself will admit that his method is more about changing a person’s habits and psychologically incentivizing debt reduction than it is about saving every last cent of a loan payoff. Other strategies for debt payoff include choosing to pay off the loan with the highest interest rate first. this technique makes obvious sense since the loan with the highest interest rate is the one where you are losing the most money. Still others will want to tackle the debt with the highest balance and another method, found in The Automatic Millionaire, suggests finding the debt with the lowest ratio of outstanding balance to minimum amount due.

I am choosing the Dave Ramsey Snowball or accelerator method for these reasons:

  1. The accelerator method more quickly reduces the number of debts and debt payments with which I have to deal every month.
  2. There is great mental pleasure in paying something off quickly. This provides motivation for tackling next debt.
  3. The accelerator frees up cash in our budget quickly. If we are in a pinch one month, I can choose not to apply the accelerator. When dealing with a minimum payment, I have no choice but to pay it.
  4. It works, I have seen it work and even though other methods might allow me to pay off debt a little more quickly, visualizing debt freedom becomes just a bit easier when smaller debts are out of the way.

As it is, I am enjoying the little victory of the final payment on that student loan, however, when we make the last payment on our van, THAT will be a reason to pahr-tay!

Article by Stew

Photo by kamshots

8 Responses (including trackbacks) to “Going to apply the Dave Ramsey “Debt Snowball Plan””

  1. my2fish Says:

    I’m with Nickel on this one – pay off the high interest loan(s) first. Feeling good about paying off a loan doesn’t make me feel good about paying more just to do it. Just my 2 cents.

  2. Chuck Says:

    I’m with Stew … its not only about the numbers for alot of people. There is the sense of accomplishment, reduced stress when dealing with a lower number of debts, potentially extra cash on hand in case of an emergency (example: two credit card debts … minimum payment on card #1 = $300.00 with a 15% interest rate, card #2 = $100 with a 19% interest rate. While the math say’s pay card #1 first; it ignores the opportunity to wipe out card #2 quickly and have an extra $100 available in case of emergencies.)

    Go with your plan Stew its worked for thousands of people … including in my family’s home. Example … My vehicle had the lowest interest rate … I payed it off last. During that time I had AC problems twice … because I had knocked out smaller debts first I had more cash on hand to pay for the repairs instead of still trying to make a bunch of minimum payments.

  3. Gina Says:

    I am on the Dave Ramsey plan. The emotional SATISFACTION of paying off a debt is EXHILIRATING! I have one more payment on my car (this month) and then I will roll that amount into my husband’s car so that both will be paid off by the end of the year.

    Chuck is right. Things will happen along the way that will “hit” your budget hard. Having those SMALLER debts paid off will free up cash for those sort of emergencies. We’ve had AC replacement, dishwasher replacement (took 8 mon to save for that) and had to replace a garage door since we started Dave’s program in 2008.

    If I had done it the “my2fish” way, I would STILL have 6 debts while all along only saving $252 dollars in interest (over 36 months – total amt of time it will take to pay everything off) by paying the highest interest rate debt first. Besides, I called the credit card company w/the highest interest rate card and got it reduced to a lower rate than my 3.99% car.

    The satisfaction of paying off 2 debts (soon to be 3), paying cash for repairs/replacements and having only 3 debts left is much better than having 6 hanging around my neck to “save” $252.

  4. Skeemer118 Says:

    DH & I paid off $10,000 in debt last year using the Dave Ramsey way. Like Gin, we’ve had our lumps & bumps along the way but we’ve picked back up each time & moved forward. No new debt has been acquired in over a year now. I am even paying cash for college & we hope to have DH’s car paid off by Christmas. We hope to celebrate debt freedom by December 2011 & start a family. :)

  5. PerkStreet Jen Says:

    Congratulations on paying off the student loan (I can’t wait for that day, but mine is still quite a ways off!). I’ve heard lots of great things about using the debt snowball method, so I’m looking forward to reading more about your experience with it here.

  6. my2fish Says:

    @ Gina: I wouldn’t say it’s a “my2fish” way – I was just agreeing with FiveCentNickel that doing the math will show that it doesn’t make sense to snowball the debt in terms of pure dollars. if you’re only “saving” $252, then I agree it’s probably worth paying off a few of the smaller loans quicker.

    my other thoughts is that in a world of electronic payments, at least for me, 3 payments or 6 payments doesn’t really make a difference if the total amount put towards snowballing is the same. you make the minimum payments each month, and IMHO, you would put any extra towards the high interest loan first.

    good idea on calling the CC company to lower your rate, too!

    cheers, my2fish

  7. debtfreecharts Says:

    I also really like the Dave Ramsey plan. As he says, it’s not a math problem. Yes, according to the math, paying higher interest rates first will save you more money, but if your higher interest debts also happen to be your largest debts, you are much more likely to burn out and quit before you get it paid off. Attack the little ones first!