Debt Snowball

When Andrew and I graduated from college, we decided we wanted to do some pretty kick-ass stuff.  We had a HUGE wedding, amazing honeymoon in France, bought a couple new cars, a house and then did a bunch of stuff to the house... it all added up.  None of it was a surprised to us.  We called it "planned debt"... I'm not sure if that's a real financial term but it sure made us feel better.  Needless to say, we accumulated debt on multiple credit cards and a line of credit. 

Not wanting to end up in a trailer park or downsize my closet, we sought out the advice of a financial planner.  Mindy was kind to us (reserving very little judgement for our early-twenties credit romp).  And she set us up with a Debt Snowball.  I wanted to share the concept with you, in case you are fellow debt rompers.  (You can send me the $250 you'd pay a planner, if you want). 

According to Get Rich Slowly (the undisputed champion blogger on the topic), debt elimination involves three steps:

1. Stop acquiring new debt. (Well duh)
2. Establish an emergency fund.  (Pretty good idea)
3. Implement a debt snowball.  (Yessss!)

Assuming you can handle steps 1 and 2 on your own, let's review the Debt Snowball.  Dave Ramsay covers this topic in-depth.  In a nutshell, the concept is: You should pay off the smallest debt first to create the greatest momentum in your debt snowball.

Note: The other school of thought is to pay off the debt with the highest interest rate first.  The Ramsay belief of attacking the smallest total amount is that the momentum you create by designing a debt "win" will propel you to the end of the process.  If you attack the highest interest with the biggest total, the concept may be too overwhelming to keep you on track, since debt reduction is such a mental game.  I really like winning, so maybe that's why it worked for us.

Here are the steps to create your own debt snowball:

1. Order your debts from lowest balance to highest balance.
2. Designate a certain amount of money to pay toward debts each month.  (You may need to cut back on your monthly expenses to put more towards the payment.)
3. Pay the minimum payment on all debts except for the one with the lowest balance.
4. Throw every other penny at the debt with the lowest balance.
5. When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.

For those of you who know me, you know I'm slightly obsessive and organized.  So when we did it, I calculated out the number of months remaining across all payments and the milestones of when we'd pay off each card (aka The Anal Kid's Debt Snowball Playbook).  Happily, we were able to accelerate our plan with tax returns, annual bonuses and surplus income.

This tactic worked so well for us, I hope you can attack your debt with your own Debt Snowball.  If you do, share your success or learning here!  I can feel the momentum now...