I want to preface this post by emphasizing that I am not an advocate for debt, ever. The ONLY debt that I consider acceptable is a mortgage. However, I’d steer away from a 30-year mortgage and choose a 15-year because you will spend less on interest in the end. I also approve of credit cards for their rewards but ONLY if you have the discipline to pay the balance down to zero each month. Someone once told me that if you have to finance it, you can’t afford it. Anyways, we are here to discuss how to take control of the debt that we may have already incurred. I will discuss Dave Ramsey’s “Snowball Effect” as the solution to your debt.
The Snowball Effect
The “Snowball Effect” is a process discussed in Dave Ramsey’s Total Money Makeover and explains an efficient way to pay off your debt. I’ve broken this process down into 6 simple steps.
Step 1: Budget (If you don’t have a budget, please refer to my budgeting post. Also, when you subscribe to my mailing list you will receive a free, automated budgeting spreadsheet)
Step 2: List your debt from smallest balance to largest. DO
Step 3: List the minimum monthly payment next to each form of debt.
Step 4: Add these minimum payments to the expenses in your budget.
Step 5: Find any leftover income in your budget and add it to the minimum payment of your debt with the smallest balance.
Step 6: Repeat this process monthly until your smallest balance is paid off. Once your smallest balance is paid off, move to your next smallest balance.
Key Reminders and Other Info
You may be wondering why we aren’t attacking our debt with the highest interest rate first. The reason is to build your confidence. After you pay that first balance down to zero, it will encourage you to keep going. If you attack a large balance first, you may be discouraged by the amount of time it takes to pay the debt off. Therefore, we will attack the balance that you can pay off the fastest first. Also, remember that you must not incur any more debt during this process. That will only make it take longer. When you’re finally able to get all of your balances to zero and eliminate those monthly payments, you will be able to save and invest those payments instead. DO NOT begin acquiring debt again. Our ultimate goal is to put more money in our pockets, not take it out.