The Debt Snowball: Your Simplest Path to Debt Free Living
Posted: Saturday, January 10, 2009
by Mogama
http://www.mogama.info
If you are floating on credit or sinking in debt, and you're tired of living from pay check to pay check, then this straightforward information is for you. You can begin to make debt-free living the firm foundation of your financial house. Yes, as an everyday person, you can do something to change your financial future, and possibly the future of your children, grandchildren, and great grandchildren.
You may not be the one buried beneath that pile of debt, but you may know a loved one or friend who is debt-swamped. Don't you want to help that person? Then forward the link of this article to that friend or family member; it might be your most important financial assistance to that person.
From personal experience I know that the following debt-freedom plan works. I shared it with members of the Debt Freedom Club in early 2000s, and many of the club members have paid off all their debts, some of them including home loans. Due to some investment hazards, I regrettably incurred some more debts, and I'm using this same plan to become debt-free again. I will share the bare bone plan here in 3 simple steps.
Step 1: Emergency Fund. Save $1,000 as emergency fund (EF). You may put this money into a checking account, which is separate from your regular checking account. Or you may put your EF in a Money Market account with check-writing privileges without fee. The EF is your rainy day fund. In case life happens while you are on the path to debt freedom, you will have money to deal with the emergency without borrowing money again. The EF is your financial cushion.
Step 2: Debt List. List all your debts from smallest to largest balance, regardless of interest rates. "But", you may ask, "why shouldn't I list the debts in order of interest rates, starting with the debt with the largest interest rate to the one with the smallest interest rate?"
Answer? Interest rates are not your problem. Your problem is bad behavior, the bad habit of overspending and borrowing only to spend more. You see, paying off your debts is 10% math and 90% behavior and emotion. What will drive you is the emotional rush you'll get as you change your behavior, as you begin to knock out one debt after the other. Don't worry about the math. The math will take care of itself if you stay intensely focused and follow this simple debt snowball plan.
Step 3: Debt Snowball. Once you have listed your debts from smallest to largest, pay off the debts in that order. Start with the smallest debt and work your way down to the largest one. Pay minimum on every debt on your list except the one at the top; apply any extra money to that debt in the #1 spot until it's paid in full.
By the way, if you owe taxes to the IRS (Internal Revenue Service) or whatever the name of the revenue agency of your government, list that debt first. Why? Because tax collectors have too much power over your financial life. They can do to you whatever they want whenever they want. The tax people can confiscate your car, house, other assets and auction them off in government auctions. Or they can garnish your wages, and there's little or nothing you can to stop them. These people can inflict more harm on you and your household than the collection department of any bank or credit card company. Believe me, you want to pay off your tax debt first and fast.
Once you've paid your tax debt, or if you don't owe taxes, start paying off the debt atop your list. Why pay off the smallest debt first? Why pay the debts off from smallest to largest?
Let's illustrate it this way. Say you are a rookie boxer. Which boxer would you like to be your first opponent in the ring? A no-name boxer Joe or a knock-out guru like a Mike Tyson? Obviously, you first want to tackle Joe the Boxer, because you stand a good chance of beating him. And beating Joe will build your confidence, as you look forward to taking on a Tyson-like boxer somewhere down the line.
Now, step out of the boxing ring and back into the money game. As you pay off those smaller debts (those little Joe Boxers), which may not take you long to knock out, you pick up momentum for the next larger debt. Nothing motivates a fighter like a winning record, a history of victory. And you want to be nothing less than an intense, passionate fighter when taking on your debts.
Every time you pay off one debt, roll over all the money you were paying on that debt to the next debt. Dave Ramsey calls this "the debt snowball", because as you move to the next debt on the list you will pick up additional "snow" (cash) to speed up the pay off process. That's what gets your adrenalin flowing, fueling your intensity.
Step 4: Reward. Reward yourself as you make progress towards debt freedom. When you pay off a debt, give yourself a treat to celebrate the victory. Such a treat is a foretaste of the financially euphoric debt-free life that awaits you.
Here is the table version of what I call the Debt Freedom Plan. For information to fill out this table, call each of your creditors, if you don't have the information you need. I wish you much success on your path to debt-free living. It's a sweet place to be. I've been there, and I look forward to meeting you there in a couple of years or so, if not sooner.
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Lender's Name & Phone # |
Debt Type or Description |
Debt Balance |
Monthly Payment |
Due Date |
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Personal Finance Company 877-962-3130 |
Vacation |
$2,000.00 |
$100.00 |
15th |
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I'm sure that those interested in the topic presented will find your article informative and interesting.Robert, I appreciate your taking the time to read the article. It's part of my personal game plan for the rest of my financial life. I'm tired of feeding the credit sharks. Thanks much. ~mogama~Mogama, as you know, always be aware of life's curveballs and you will do fine. As always best wishes, Robert.
A much needed article, with the economy as it is today.Some of us could use a refresher course, Financial Health 101.ThanksHi Mia. I agree completely. I'm taking the course myself, and I guess I'm recruiting other students for the class. Enjoy your day, and thanks for your comment. ~mogama~
This is a great article. It doesn't quite deal with the debt problem we ended up in, but great advice for over half of Americans in current financial crisis.Something interesting that my husband and i discovered when our son had some medical issues and I had to quit my job to stay at home causing our imcome to sudenly be half of what it was is that we get into many things which are forms of debt without even really thinking of it as debt, because it doesn't gain any interest or whatever. I'll give you a couple of examples of what we experienced.When I became a homemaker again, I found many joys in the job and realized some great lessons. Part of what is wrong in our culture is no mother in the house, guiding those teen agers and giving them things to reflect on later and so on. We provide child care for our children, but no longer see it as the parental job to raise them.But anyway, we thought we had no debt. We paid off our credit card every month, used it for convenience. We had a savings account seperate from retirement money and so on, just in case we needed it, which we were about to because of medical bills, but things began to go horribly wrong. We tried to sell one of our cars and realized we owed more than it was worth, we tried to trun off the three cell phones we had and found that we had 16 months to go on the contracts and would have to pay hundreds to have them turned off. Teh cable company said that when we accepted the free HBO for two months that was like signing a signature to a two year contract for service, and then we got a nice letter in the mail from the county auditor saying that our property taxes had gone up because our property value was up. We decided to sell our home, pay off these contracts and be done with it, but then while our home was on the market it was hit by arson. It was all so scary and by the time that was done being repaired the market bubble was bursting and our home sudenly wasn't worth what we bought it for several years earlier. Now we are in bankruptcy like a lot of people, a number in the system. But try to remember that every person got into their situation individually and self discipline is really the ticket out.While I understand your logic, I disagree about order of paying things off in most cases, because you have to choose to start handling finances more logically if your are like a friend of mine who told me she has twelve credit cards to pay. Who even opens twelve credit accounts. That's just begging for trouble. Maybe I just don't get it and shouldn't be advicing anyone in that situation. But I think if you can't pay off your higher interest first then the pattern of behavior will most likely repeat itself. But if you pay higher interest off first then you will actually be out of debt more quickly. But quitting debt is like quitting smoking, gambling or whatever. You have to stop being short sighted, and remember when you take that $50 cellphone you are actually taking on at minimum $1200 in debt for that piece of plastic convenience. Or when you apply for the target to get the 10% off your order you better cancel the card as soon as you get home. You're better off to buy things like phones at full price anyway, because then it leaves you the consumer in control if the company does things you don't like and you decide you want to change service and when you take their promos you are pretty much screwed over. I will send a link of this article to my friend with twelve credit cards though, because maybe this is the route to go for her. Thanks!Thanks for sharing your personal story. Sorry for all that trouble. Sometimes things just spiral out of control, and before we know it, we're swamped. May you bounce back after all that.
For the years that I have been offering financial coaching, and from listening to a financial expert like Dave Ramsey, I have learned that paying off debts is not so much about math or logic as it is about emotion. When it comes to consumer debt or credit card debt, most of us do not go into debt by logic; we mostly borrow on impulse. That's why it can be useless to rely on logic -- like pay off the debt with the highest interest rate first, etc. It does not usually work that way, at least not in my years of experience working with individuals and families manage money using biblical principles.
For the reason given in the article, it always builds momentum that leads to success when a person pays off debts using the Debt Snowball method that lists debts from smallest to largest, regardless of interest rates on the debts. Why? Because borrowing or paying off debt is less about logic, more about emotion. Thanks for your comments. Enjoy your day! ~mogama~Oh I understood what you meant in the article. I just think that in many cases people simply need to decide to stop spending money on impulse, stop paying bills based on how it makes them feel and start seeing the bigger picture, but then again I am an over thinking and as I said, I thought I had no debt. We all owe our souls to someone, but I did send your articles to my close friend who struggles in this erea, buying things on impulse will never be something I understand and I guess that is a good thing.
Your article on this issue might help some of us who are pritically living on credit cards and receiving pay check by pay check. On like the united kingdom who only source of funds is tax and national insurance what you guys call social security. With what is going on our government is still increasing taxies and other insurance, thousands of people are out of job, the job centre is in queue every day. Well thanks for your artice I will take a proper look at it and see what I can make of it.Good day, Regina. I'm using this plan myself to pay off my debts for the second time. When I'm debt-free this time, there'll be no turning back to a life of borrowing.
As for our government officials, it seems like they all lack any form of creative ways to manage the people's tax money. All they ever know is spend more money, then raise taxes. In the USA, we call it "tax and spend". But one day the citizens will get fed up and rise up against these clueless leaders. Hopefully, they'll get the point then. Thanks for your comment. ~mogama~
Nice article.The debt snowball technique works for sure. I definitely advocate it. However it is most effective if you negotiate your debts with your creditors first. This is something that is discussed in a lot of detail on a really great website about debts called Loan AmnestyThanks, Debt Free, for your great input. I'll start including that element when I do money coaching. ~mogama~Great article! Don't forget that if you want to stay out of debt for good, you are going to have to plan for financial disasters. That means you need to have good insurance on the right things, which could have helped the person in one of the previous comments. You also need a good fully funded "emergency fund" that covers six months of living expenses, so that you can cover higher deductibles on the insurance and can afford to get good coverage and so you can get rid of ALL credit cards (start using a debit card when necessary, but prefer cash when possible). This is especially true with health insurance - many people who struggle with health insurance costs need to know about the Health Savings Account and the companion insurance. These are also important elements to staying out of debt when disaster strikes, even when it happens back to back. Planning ahead for these things is key to staying out of debt.We want your comments! If you can read this, you don't have javascript enabled, so you can't use this comment system. Please enable javascript.Copyright 2012 IcoLogic, Inc.Viewed from Cache.
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