Over the past year while we have been building our dream house we have accrued some credit card debt. Our only other debt is my student loans which I have paid $20k off of so far (yay!), but I wanted to get serious about our cc debt so I started researching which method was best to start tackling the debt. After running all the numbers I found that Dave Ramsey’s Debt Snowball is really the fastest way to pay off the debt. His theory is that you will stay encouraged to pay off the debt as you see the smaller debts fall away, as opposed to feeling that they aren’t moving at all. Luckily for us our smallest debt also has the highest interest so that will be the first card we attack. Wondering how the Debt Snowball works? Here’s how:
Dave Ramsey says that before you start aggressively paying down your debt ensure you have $1,000 saved for emergencies.
Once you have your emergency fund set aside, list all debts in order of smallest to highest regardless of interest rate. This should include all debts except your house and include your cars. Right now I am focusing on our credit cards only because the interest rates are SO HIGH and once they are wiped out I am going to do the Debt Snowball again with my student loans, which have interest rates pretty low around 2%.
Attack your smallest debt with everything you have while continuing to pay the minimum payments on the other debts.
Once you have paid off debt #1 (smallest), put all of the money you threw at debt #1 and use that to debt #2 plus its minimum payment. So you are paying the same amount each month you already were but stacking it onto the minimum payment you are also already used to paying.
I think its hard to know how much you should throw at the debt without having a budget so create a budget first to see after your fixed expenses (mortgage, loan payments, water, electric, etc) and monthly costs like groceries, gas, etc. how much you really have that you can afford to put towards debt. Say that after all of your fixed and usual costs you have $500 a month leftover. Now remember you are still paying your minimums to your other debts in your fixed expenses so this $500 is just “extra” money. Since you already have your $1,000 emergency fund you should throw this entire $500 at your lowest debt and continue to do so each month until it is paid off. Once that debt is done, you apply the $500 each month to your debt #2 while still paying the minimums on the other debts.
Now say after all of your bills and your CC & Loan minimums you have nothing left over each month to put towards debt, well this is where we need to get creative to find money to pay off debt. Here are some ways to “find” extra money:
Cut Costs – Give up Cable, Break up with your internet, stop buying Starbucks or go on a shopping ban per Blonde on a Budget. I wrote a detailed post on ways to cut costs from your current budget – read it here.
Look at your cars – If your car payment is too high and you have no money left over to pay debt look into getting a cheaper car or even share a car if possible to save that payment and send it to your debt.
What I like best about the Dave Ramsey’s Debt Snowball method is that you stay encouraged, but just the plain math of it speaks to me. I created a spreadsheet showing if we use his method vs. throwing large sums towards cards in no order each month and even though you are paying the same amount each month it actually pays off your debt quicker if you do the Debt Snowball which is what made up my mind. I can’t wait to get started on this and have all of our cc debt paid off in one year! I also plan on throwing our Tax Return in the mix so that should get us there faster. Are you using Dave Ramsey’s Debt Snowball method and do you love it? Share with me in the comments below!