Going to apply the Dave Ramsey “Debt Snowball Plan”
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:
- The accelerator method more quickly reduces the number of debts and debt payments with which I have to deal every month.
- There is great mental pleasure in paying something off quickly. This provides motivation for tackling next debt.
- 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.
- 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