The Debt Snowball

The Debt Snowball

Don't feel rushed. If you're still working on your $500 EF, stick with it, and come back to this post, later. Once you’ve taken stock of your numbers, stashed away your $500 EF, and found a little wiggle-room in your monthly balance,  you can attack your debt. If you do not have debt, but just want to build your cash balance, this is for you, as well. This is where things become fun and creative. My sister, Cat (see my initial Welcome to My World post), began years ago experimenting with frugal hacks to kill their debt, and it was fun following along. Not only did I learn cool pantyhose tricks, I also learned how to eat very well on a tiny budget.

There are lots of great blogs and podcasts out there to excite and inform you, and keep you motivated. More on that, in a few minutes. Before attacking your debt, please consider the following:

While not absolutely necessary, consider online banking if you’re not already enrolled.  All banks and credit unions offer this option. You need two accounts at the same bank: one to stash your emergency fund (EF), and one for daily money management (paying bills!). We use Capital One 360 and love the ease of use. We have a regular savings account, and a regular checking account. Each are joint accounts, and we can easily transfer between savings and checking accounts if we have to. 

As soon as you have opened your accounts, enroll in automatic deposit with your employer, if offered. You can usually do this online. This is not mandatory, but automation is your friend. Electronic banking will help track your spending and help you save money!

Once enrolled in online banking, go to the Bill Pay option and load your payees (bills). This will require your account numbers, billing addresses, and phone numbers. It takes a while to set up, but no pain, no gain! Establishing online banking accounts and automatic payroll deposits may take a couple of days, so start the process as soon as possible. Try to steer away from paper checks, and paper deposits. Some older people are afraid of security issues and avoid electronic banking. You are more likely to suffer a security breech using paper. Paper checks are easier to steal and can get lost in the mail. Electronic transactions require secure logins and passwords, and paper products do not! Remember, you don’t have to enroll in online banking, but it’s highly recommended.  Okay.  Do you have your two accounts? Are you ready?

Say hello to the debt snowball.

Debt-buster guru Dave Ramsey is a big advocate of the debt snowball, and I am, too. Here’s how it works:

Attack the smallest debt, first. This means the smallest debt BALANCE (in parentheses on your expenses list). After paying only the monthly minimum on each of the other debts, throw extra money at this smallest debt. Do whatever you can to pay more than the minimum. Laser-focus, one debt at a time, to speed up your efforts. Every extra dime should go toward this smallest debt.

When that debt is paid off, move on to the next smallest debt, continuing to pay only the monthly minimum on each of the others, and throwing even more money at this one. (You’ll have more money to do so, after paying off the previous one.)

Move on to the next debt in line: rinse, and repeat, until all your consumer debt is paid in full. This should happen fairly quickly. In my introductory post I mentioned that my sister, Cat, and her husband, paid off $25,000 in eight months.  Once the snowball starts rolling, it moves quickly.  

Wait! Shouldn’t I attack the debt with highest interest rates, first?? Many people argue that debt will move faster using this approach, often called the debt avalanche approach. It’s true- you’re going to save interest money by hitting higher interest debt, first. However, for me, knocking out the smallest balances, first, gave me a huge psychological boost. Eliminating 3 or 4 small credit card balances, regardless of lower interest rates, was much more satisfying than trying to chip away at a massive, higher interest auto loan, for example.  The only exception to the debt snowball approach, in my opinion, is when you have debts with balances that are close to the same amount. In this case, paying off the higher interest account makes obvious sense.

You’ll notice that budgeting has not been discussed here. We do not budget, per se. My philosophy is this: if you try every month to not spend ANYTHING, you’ll reach your goals faster. So, while in the debt-reduction phase, I approached every month as a no-spend month. (This implies no-spend for extraneous things like eating out, buying clothes, grabbing Starbucks coffee, etc.) Obviously, it’s not easy to avoid extra spending. The goal should be to keep discretionary spending as close to zero as possible. Every dollar blown on Starbucks is a dollar less to throw at debt.

For motivation along the way, I highly recommend acquainting yourselves with blogs, books, radio shows, and podcasts designed for people like you and me.  I also welcome your input, here. My good friend, Seung, recommended the first two fantastic resources for me, and I am grateful for his advice.  These resources and life hacks will follow you beyond debt-reduction and well into the wealth accumulation stage.  Google the following, and see what you think!

Blogs:

Mr Money Mustache –for people interested in FIRE (Financial Independence Retiring Early)

Frugalwoods- for those interested in FIRE, but mainly creative frugal hacks and intentional  living

Podcasts:

Dave Ramsey - for those wanting debt-reduction advice, and wealth building tools (religious)

The Scott Alan Turner Show-  for debt reduction advice, wealth building tools, real estate investing

The Minimalist Podcast- living on less, with less

Books:

Total Money Makeover by Dave Ramsey

The Millionaire Next Door by Thomas Stanley and William Danko

You now have the basic tools required to get started on a new financial trajectory. Stay the course. Don’t beat yourself up if you fall off the wagon. Jump back on! Find friends who share your desire to become financially independent and seek their encouragement. Some people climb out of debt in months, some take a few years. It shouldn’t be a miserable time—in fact, for me, I had fun trying new ideas and experimenting with ways to lower my expenses. If my sister, Cat, doesn’t kill me first, I may even share some of what she taught me.

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