I’m dedicating this post to my friends who have hopefully been inspired to change the way they look at their debt and finances.
Debt is as much as a philosophical issue as it is monetary. The way I treat money is different because I’ve changed the way I perceive debt.
Dave Ramsey always says, “The borrower is slave to the lender.” That’s hard to argue with. Each time I borrowed money in the past, I allowed myself to become beholden to the lender. You no longer have control of your money, because someone else is entitled to a part of it.
A few years ago, I worked as a bank teller. I’ll never forget a particular customer I had working in the drive-thru. She drove up in a brand new Mercedes and was dressed very professionally. Perfect hair, makeup, expensive handbag, dripping with jewelry. You all know the type. She wanted to make a withdrawal. I brought up her account and… she had less than 20 dollars in it! I was floored. I just assumed she had money because she possessed expensive things.
Juxtapose that with a nanny that came in regularly to deposit her check. Reasonable late model car and dressed normally. Not dressed fancy, but she was put together with care. She had close to $30,000 in all her accounts.
Now, I’m not saying everyone who drives a brand new luxury car is up to their eyeballs in debt. But I do want to break you of the myth that those who look like they have money actually have money. In my experience, it’s usually not the case. In today’s world, possession doesn’t necessarily mean ownership.
Now, let’s talk about the process of unchaining ourselves from debt and not being one of the those 30 thousand dollar millionaires!
Before we dive in, here are a few things that must be done before the debt snowball:
- $1,000 Emergency Fund
- Current on all debts
- Stop all retirement/savings contributions
- Zero-based budget (see my previous post, Dirty-B Words on how to set up your budget)
- Remove all credits cards from your wallet
Baby Step 2 is to pay off all the debt except for the mortgage.
Take out your debt lists. Make sure the debts are listed from smallest to largest. Interest rates won’t matter, because once the debt snowball gets rolling, you’ll pay off the debt very quickly.
Pay the smallest debts first. And really attack it. Work overtime or a part-time job if you need to. Remember that every extra dollar you throw towards that debt means you’re a dollar closer to being debt free. Once each debt is paid in full, cross it off your debt list (my favorite part).
I started my debt-free journey long before I heard of Dave Ramsey. I was about 21, in college and tired of being broke. I had about $7,000 in credit card debt and a few smaller items like parking tickets and medical bills. I started knocking out the smaller ones with whatever extra money I had (it wasn’t much), and I really felt like some of the weight had lifted.
Unfortunately, after I had paid the smaller items, I felt the smart thing to do would be to pay off the highest-interest credit card debt ASAP. Let me tell why this didn’t work for me:
- It was slow going. Because I hadn’t freed up the cash flow from the smaller credit card debts, it took me nearly 18 months to pay off close to $2400 on my American Express.
- It was demoralizing. The extremely slow process made me think I would NEVER get out of debt. You have to get some smaller wins before you attack the really huge debt.
The way the debt snowball works is something most financial experts have been teaching for years. However, Dave Ramsey is the only one that will tell you to start off with smaller debts. Let’s walk through why this is a much better way of debt payment.
There is a FREE Debt Snowball Tool on Dave Ramsey’s website that can calculate how long it will take you to pay off your debts. It will also automatically carry over your snowball amount to the next largest debt. I use this at least a few times a month to track my progress.
Currently, here is my outstanding debt:
Car Loan: $4,675.65
Student Loan: $18,062.69 (almost below the 18k mark!)
I’m paying close to $630 a month on my car loan (including the $223.30 minimum payment). Once I reach my savings goal of $1000 for my braces in March, I’ll be adding an extra $333.34. That totals to $963.34, almost a thousand dollars a month! May is a three paycheck month (YAY!), so I’ll treat it as extra cash and put all of the $1230 toward my car. I also have about $100 coming back to me on taxes, so that will be added to the payment. If I REALLY bust my ass, I can pay off my car by the end of May!
Once the car loan is paid off, I can start tackling my student loan. With the extra $963 previously put towards my car added to my minimum payment of $223.30, I can bring up my monthly payments to $1162. Are you all starting to see how the debt snowball works?
Feel free to comment on this post and share your own debt-free story. Also, you can now follow Running Out of Debt via email! The principles covered in my blog are from The Total Money Makeover by Dave Ramsey.