Of all the things that people think of when it comes to finances, debt it usually near the top of the list. Many people dream and aspire to get out of debt. There are many strategies for getting out of debt. Many financial gurus have their own “key” to becoming debt free. I’ve read a lot of books and I’ve been to a lot of seminars on finances and I like the plan made popular by Dave Ramsey the most. Dave has a plan called the debt snowball. The debt snowball is a very simple plan that anyone can follow.
There are 3 simple steps:
1st – List all of your debts. Place the bill with the smallest balance at the top of the list, the next smallest next and so on.
2nd – Find an additional $200 per month. Where do you find $200? By getting crazy! You really want to get out of debt? You’ve got to be willing to do something crazy to get out of debt. Trying to find $200? Cut the cable! Cut the cell phones! Get rid of the newspaper! $4 for coffee? Cut it! Do whatever you need to do to find that extra $200 per month.
3rd – Begin applying that extra $200 per month to the minimum payment of the first debt on your list. Once the first one is paid off, apply the amount you were paying on the first debt to the second and so on until all of the debts are paid off!
Here’s a nice fat example with some numbers that will blow your mind.
Making the minimum payments on these bills will take 120 months (10 years!) to pay off. Using the debt snowball it will only take 21 months! That’s a difference of 99 months! That didn’t blow your mind? Look at this – Invest that $1110 for the remaining 99 months at 12% and you end up with $186,569.86! An extra $200 per month gets you debt free and enough money to buy a decent house in most places! You think that’s worth getting a little crazy? I do!
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Great Post. I had never really looked at it like that, it makes a lot of sense though. I particularly like how you followed up the $1100 of now spendable money, with an investment plan! Most people would say, “hey, the $300/month credit card is gone! lets get a car!”
That’s so true how many people immediately run right back into debt after freeing up the money that they were using to reduce debts!
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Great post!! My wife and I dug our way out of debt before we knew about Dave Ramsey, but we essentially used his plan – payoff debt smallest to largest. My wife and I have been virtually debt free since then, and I listen to Dave Ramsey several times a week to help me keep my resolution to avoid debt.
I have also read all of his books and given them as gifts to others. Unfortunately, until people decide to take action on their own, they seem to think living without debt is crazy. Several of the people I gave his book to were the same ones who complain about their debt service, but they are also the ones who don’t put forth the effort to even read his book (all of his books are quick/easy reads).
The spreadsheet you used to show how the debt snowball works is great, and it is a very powerful image!
Now I believe the debt snowball really can work for people who have the time to take care of their bills on their own and who aren’t really struggling to pay them in the first place. But for people who have over extended themselves I dont really think it is as beneficial.
Steve,
That’s true, however that’s why I talk about finding the extra $200 per month by cutting back.
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