Dave Ramsey's Debt Snowball Method

[Henry]

If you're feeling overwhelmed by paying off your debt, try this.

Dave Ramsey has a book called "Total Money Makeover"

He proposes the Debt Snowball method of paying off debt.

The method

Pay off your lowest balances off first. Ignore interest rates. Still pay the minimum on all of your debt but pump any pennies you can pinch into the lowest balance to eradicate it the fastest.

This doesn't make sense from the nickel and dime view but it's psychologically better.

Why?

Because psychologically, 7 outstanding debts "feels" more overwhelming than 2 outstanding debts. Even if they're at the same total balance.

He's trying to enforce behavior modification vs. math.

[annie]

I tried it, and used it. It worked great! Still takes a lot of discipline and you have to get out of the mentality..."Oh, when I pay this off....I'm going to buy this!!!"

Stick to it for a few years and become debt free.

Dave's is a "paper" method. I used an internet version that showed me how much interest I've saved. By applying this method, over the 30 year haul...I'll save $195,000 in interest!!!

WOW! That's MY motivator

Thanks for putting that out there. Financial Peace is also very good!

[Dan.Linehan]

Originally Posted by annie

Thanks for putting that out there. Financial Peace is also very good!

Cheers for credit being ruined at an early age so I knew the traps of it all =)

Debt Free ('cept for car payment)

[Henry]

Originally Posted by Dan.Linehan

Cheers for credit being ruined at an early age so I knew the traps of it all =)

Debt Free ('cept for car payment)

That doesn't count!

In that case, I'm debt free (minus student loans).

[Mycroft]

Back in 1999, Dave's book, Financial Peace changed my life. My wife and I were already $5,000+ into debt after our second debt CONsolidation loan. It's now about 7 years later, but the house, we're completely out of debt with two paid for cars, $20k in emergency funds, IRAs filling up and the mortgage will be paid off in less than 3 years.

Who knows what kind of debt I'd be in if I hadn't read that book. I certainly wouldn't have had the guts to start working for myself 4 years ago. Thanks Dave!

[annie]

Originally Posted by Mycroft

Back in 1999, Dave's book, Financial Peace changed my life. My wife and I were already $5,000+ into debt after our second debt CONsolidation loan. It's now about 7 years later, but the house, we're completely out of debt with two paid for cars, $20k in emergency funds, IRAs filling up and the mortgage will be paid off in less than 3 years.

Who knows what kind of debt I'd be in if I hadn't read that book. I certainly wouldn't have had the guts to start working for myself 4 years ago. Thanks Dave!

Great story...thanks for sharing

[dorothy hanna]

Dave Ramsey's great. I've been doing his Gazelle Intensity snowball method for less than a year, and it's working like nothing else came close to. It kind of reminds me of Steve's overwhelming force article.

[Steve]

It's worth noting that the Debt Snowball method isn't always the cheapest way to pay off your debt.

It's a great way to provide a psychological boost, but if you have the discipline to pay off your debts, you should always look to pay off the ones with the highest interest rates first.

[Mycroft]

"you should always look to pay off the ones with the highest interest rates first."

That makes sense from a financial planner perspective, but for folks who are in debt up to their eyeballs, it's better to go with the psychological boost that comes from tearing up CCs and bills by knocking out some lower balance debts and focusing all that money on the next one up the ladder.

[annie]

Originally Posted by Mycroft

"you should always look to pay off the ones with the highest interest rates first."

That makes sense from a financial planner perspective, but for folks who are in debt up to their eyeballs, it's better to go with the psychological boost that comes from tearing up CCs and bills by knocking out some lower balance debts and focusing all that money on the next one up the ladder.

That online debt reduction tool I mentioned does all the math...and it's not necessary the best to pay off the highest interest first from what I'm told. It's a Huge math problem and takes into account interest AND TIME...and important distinction. So like I said, it does the math and then ranks debt according to the pay off you should use. I have a free demo....I'll be back with a link. A link to a free financial analysis with your debt-free date, how much interest you have to pay now vs. how much if you use the roll-down method...VERY COOL

[annie]

https://afm.atisuccess.com/NewAnalys...Entry.asp?ref=

Try it out. I did this, took a look at it and it blew my mind and I have been a fan of the roll-down ever since.

If you're uncomfortable putting in your email (I think that is a link to my site, so the email address goes to me...and I promise I won't spam you...If you're interested, you contact me!) then look at this sample

ATI QuikAnalysis

[Steve]

Originally Posted by Mycroft

"you should always look to pay off the ones with the highest interest rates first."

That makes sense from a financial planner perspective, but for folks who are in debt up to their eyeballs, it's better to go with the psychological boost that comes from tearing up CCs and bills by knocking out some lower balance debts and focusing all that money on the next one up the ladder.

Right, that's why I clarrified that if you need the psychological boost, go for it. I'm not disparaging the debt snowball.

I just wanted to point out another option for those looking to save the most money. When it comes to finance, there's rarely one correct answer for everyone.

[Pat P.]

I started with the snowball method in early February, when my wife and I were around 25K in debt (two car loans + a lot of credit cards debt). Next week I will pay off the last 3000 to Am. Express, so we will finally be debt free.

Although many people argues about the optimatillity of Ramsey's method, the main purpose is get out of debt as quick as you can. You may end up paying a bit more in interests, but when cleverness has not helped you in the past to be debt free, is better to go back to basics and follow a simpler strategy. Those small victories, when you are done with each particular debt, really help you to keep going for the ultimate prize.

Pat

[Mycroft]

WOW! $25k in ten months!!! Now THAT's "gazelle intense"! Great job Pat!

Bob

[Pat P.]

Thanks. We have been in debt for the last 4 years (3 of which we didn't make much progress) so the feeling of getting closer and closer to being debt free is just great.

One of the key elements that help us achieve the goal was using a bi-weekly budget (we get wages twice a month). It helps to keep expenses under control (and to apply the "extra cash" to the snowball) and it may help to identify the places where one can save.

We use to go out to eat a lot, and thought we didn't cut it completely this item, we assigned a fix monthly amount. The same was for items like food, clothing or car related expenses.

In my first budget version I was very detailed. I have many categories and subcategories. Now that I am in my 3.0 version, I have simplifyed and eliminated some items. Just be willing to adjust and tweak. Now I spend no more than 15 minutes preparing the budget; just a few adjustments here and there.

For those readers preparing a budget for the first time, let me make a two suggestions:
1) Budget some "blowing money". When I started, I was committed to spend no money on silly stuff, but after a few months I started to miss them. Reserving some money helped me staying on track without going crazy.

2) Discuss the budget with your spouse or partner, and if you are single, with someone trustful and responsible. It can save your troubles and money.

I hope it helps.

Pat

[Mycroft]

I agree. It's very important to set aside a specific amount of money for "blow" money. You may not spend it, but it's comforting to know that you actually can buy a latte if you get really desperate.

Bob

[maken]

Originally Posted by Henry

The method

Pay off your lowest balances off first. Ignore interest rates. Still pay the minimum on all of your debt but pump any pennies you can pinch into the lowest balance to eradicate it the fastest.

This doesn't make sense from the nickel and dime view but it's psychologically better.

Why?

Because psychologically, 7 outstanding debts "feels" more overwhelming than 2 outstanding debts. Even if they're at the same total balance.

He's trying to enforce behavior modification vs. math.

If you are looking for a psychological factor, wouldn't it be better to roll all of them into one i.e. a consolidation loan?
IMO its better prioritise the debt with the highest interest rate, with some disciplined, you'd save more in the long run!