No snow here in Georgia, but plenty of snowballs!
My topic for today is the logistics of the popular term/method, the "Debt Snowball". Many, many personal finance gurus tout this method as the #1 hands-down best way to get out of debt, quickly. I personally became aware of it by listening to Dave Ramsey, but there are a lot of other people who advise this as well. (I'm a huge Dave Ramsey fan, if you haven't gotten this by now.)
The basics of the plan is that you list your debts, smallest to largest, and make minimum payments on everything except for the smallest debt. On that debt, you take all of the extra cash you can spare per month and add that to the payment. When the littlest one is paid off, you take the amount that you were paying on it (the minimum payment plus the extra cash from the month) and add it to the minimum payment for the next smallest debt. When that debt is paid off, you add the payment for that to the next smallest debt, and so on from there until all of your debt is gone. In this way, you add a larger amount onto the payment each time you pay off a debt, in the same way a snowball accumulates snow as it rolls down a hill.
Here's an example. You owe $300 on a credit card, $800 on a personal loan, $2300 on your car, and $4000 on a student loan. The minimum payments, respectively, are $20, $35, $180, and $300. Assuming that you can meet the minimum payments for all of them (I hope you can, otherwise you're in a bad spot), after all your bills you have $50 extra in your budget each in month. So you pile that onto the $20 payment for the credit card, bringing the monthly payment for it up to $70. In the interest of time I'm not going to calculate interest on these loans, so you've got the credit card paid off in a little over four months. In the fifth month, you make the final $20 payment to get the credit card completely cleared. You have $50 left that month, and you add it on to the $35 personal loan payment, making it $85. (By then, you owe $540 on it, having made the minimums for four months). The next month you add the $20 that you would have put on the credit card, bringing the payment to $105. You make that payment for five months, then in the sixth month make the final payment of $15. You add the $90 that you have left over to the $180 car loan, at which time you owe $230 after ten months of minimum payments. The next month you pay it off with a payment of $230, and have $65 left, which you add to the student loan. By then, you owe $335. The next month you pay that off completely as well.
This is a REALLY rough example- interest adds a pile onto each debt each month. However, the concept remains the same. Now, the arguments against doing a snowball- I've heard people say, well, I want to pay off my car first because it's the most necessary if I lose my job in the future, or the rationale that you should pay off the debt with the highest interest rate first to save money on interest. These are valid viewpoints, and make financial sense. If you legitimately believe that you should be doing that, good on you, I say go for it. Financially it makes the most sense. But the reason the debt snowball works is because of the psychology behind it. "...when you ditch the small debt first, you see progress. That one debt is out of your life forever. Soon the second debt will follow, and then the next. When you see that the plan is working, you'll stick to it. By sticking to it, you'll eventually succeed in becoming debt-free!" (https://www.mytotalmoneymakeover.com/index.cfm?event=displayArticle&articleID=118512)
The rush you get when you see one of your debts completely disappear is usually the perfect motivator to get you to keep yourself in gear to continue your debt repayment plan. I would even go so far as to work out a small reward system for yourself each time you pay off a debt- not something so expensive that it puts you further in debt, but something small. I personally would maybe buy a new paperback, or a double-chocolate-chip Frappuccino (delicious, but at almost $5 each, not exactly something I allow myself every day).
Paying off debt is rewarding in and of itself. With every loan you pay off, your financial future gets a little bit more secure. And that's a little bit less of your hard-earned money that goes to interest, pure profit for the banks straight out of your wallet, ugh. Not padding a banker's checking account at my expense sounds pretty good to me.
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