Back to Basics: The Debt Snowball
June 30th, 2008 | by Molly's Brother |With this ongoing housing crisis and credit crunch, it’s time to for Americans to get back to basics. Over the course of the next few weeks, I am going to re-post some helpful tips to help us refocus our efforts and reload our savings accounts.
I know that there are dissenters out there. And I know that there are critics of his, too. (I am one, too. Dave gets a little to religious and preachy for me at times, so I can see how we can turn some non-Christians off.) But the reality is that, out of all of the debt elimination strategies, Dave Ramsey’s “Debt Snowball” is my favorite and, I think, the most effective.
What is the Debt Snowball?
For those of your new to the personal finance blogosphere, the Debt Snowball is a debt elimination technique that was created by Dave Ramsey. (In addition to having authored books and hosting a daily radio show, Dave has a TV show on the Fox business channel. Or at least, he did. I don’t get the channel, so I don’t know.) If you are not familiar with Dave, run and buy his book. (Or click over to buy his book.)
How does it work?
The debt snowball suggests that you list out all of your debts. Then, while paying the minimum payments on all your outstanding bills, you attack the smallest debts first. In addition to that minimum payment, you throw all your extra money at that debt. So, instead of (let’s say) paying $200/month on a credit card debt. You find a way to make an extra $100 or $200 a month. You now put that extra money towards that credit card. So, now you are paying $400/month towards the debt. Once you’ve paid off that debt, you then take THAT $400 and add it to the minimum payments of the next one. So now, you are putting $400 + minimum payment towards that debt. Once you pay that off, you then take that new amount and pay off the next debt. Ideally, once you get to the larger debt amounts, you should conceivably be able to pay them off in a fraction of the time.
One Important Note
It is important to note that Dave has developed an entire system to debt reduction and financial freedom. This is merely one small–but important–aspect of it. In order for this to work successfully, I believe that all other aspects of his plan must be followed as well. If you are unfamiliar with Dave or are interested in re-committing to his Total Money Makeover, head on over to Amazon and get his book.
