You did go through your bank statements, right?
If not...don't keep reading! Go do that first!
It's a very important step!
Step 2: Building Your Debt Snowball
As I mentioned in my first post, Dave Ramsey has been a huge influence in the way we're focusing on paying off debt. His "Total Money Makeover" method has helped us to build an emergency fund, put a little money into another savings account each month, and pay off debts faster than we would have originally, if we had just stayed with the minimum payments each month.
One of Ramsey's claim to fame is his "debt snowball" method, that I'm going to share with you today.
He outlines steps to becoming debt-free, building wealth, and then being able to give generously with no worries. One of his biggest taglines is to "live like no one else now, so you can live like no one else later."
It's really about putting our instant gratification aside, and focusing on the big picture. Before making any purchase, I always think to myself, "What Would Dave Do?" :)
Okay, so back to the debt snowball.
If you've been reading my blog over the last few years (or if we're friends on social media), you might recall a post I wrote back in April of 2013 on our debt snowball. It has changed a bit since then, but that might give you a little background knowledge on our financial progress over the years.
Alright...ready to get started?
Ramsey's first step is to get a $1,000 emergency fund stored away somewhere, just in case. The way we did this was to put that emergency fund as the very first item on our debt snowball and then pay a payment to that account every month. We started with $100 a month because it's what we could do. If there was any extra money leftover in the budget at the end of the month, I moved that money over to the emergency fund also. It should have taken ten months for us to build our emergency fund, and with the snowball method, it took us six.
The next step is to list all of your debt, from the lowest balance to the highest balance.
Now, I will be the first to admit that we strayed a bit from this method. Mary Hunt, another well-known financial guru, says you should list your debts from highest interest to lowest interest. Ramsey says lowest balance first because those small victories of paying debts off will propel you into paying the higher balances off with newfound motivation.
I agree with both Hunt & Ramsey's methods, so we took a cue from each and put the debts in an order that worked for us.
After the emergency fund, we put any debts that were under $500. Those would be easily paid off within a few months and would give us extra dollars to put roll into our debt snowball.
Then we kind of went with Mary Hunt's method and started higher interest items. We have a vehicle loan that is our highest interest item. It's not terrible...I think somewhere in the 6% range, but over the years, that 6% will add up for sure. So we put that loan next. We stay with our smaller loans first and get all of them listed in the best possible way to pay off debt quickly, stay motivated, but not give too much interest away, in the process.
Those "huge" debts you have should be saved until the very end. In our case, this is our mortgage and my student loans. We put those as very last. Pay off your smaller debts and you'll be able to put thousands of dollars on your house payment sooner than later!
Alright, so here is our current debt snowball items listed. Your list should look similar to this.
- Emergency Fund ($100 monthly payment)
- John Deere ($161 monthly payment)
- Overland Park Regional ($150 monthly payment)
- GMC Denali Payment ($352 monthly payment)
- GMC Truck Payment ($311 monthly payment)
- House ($860 monthly payment)
- Student Loan ($250 monthly payment)
Our Emergency Fund is already funded, so on our debt snowball, we have that marked off as paid.
The $100 that we were putting into that account now goes on our John Deere loan, making that payment $261.
When we pay off the John Deere loan (in just a few months!), we'll add that $261 onto the hospital bill and that will be a payment of $411.
Do you see how this method is like a "snowball"? We keep rolling our payments onto the next payment and we will have these items paid off in no time! Plus, we'll be saving the interest that we would have paid to them!
Now, before you start rolling anything into a snowball, you must make sure you are current with all payments. We cannot budget correctly if we aren't current on our bills. And don't get ahead of yourself on the snowball. Only add extra money to the top item and watch those smaller debts quickly fade away. For me, it's like a game. I try to pay off as much as I can in one month and try to "beat" myself on the dates I had originally planned to pay things off.
Like I said in my first post...I'm a total nerd.
Okay, so now we have our debts in whichever order you feel is right for you.
Next, we're going to add those debts to some sort of a snowball tracking form. There are many options for this.
You can write them down on paper and track it that way. I did that for several years before I found the iPad app I use now. Every month, I redid my snowball and accounted for any extra "found" income that I could roll on top of it. Good old fashioned Pencil & Paper is totally acceptable!
You could make a spreadsheet on the computer. I also did this for a few years. At the top, I put the months and down the side, I put my debts. Each month, I added the payments I would be making and added whatever extra I could to the next debt in line. A spreadsheet works too!
Dave Ramsey has a website that will help you build your snowball, but it's a $9.99 per month subscription. I did it for a while and one day just decided that I could be putting that $10 a month on top of my snowball! Every little bit counts!
The tracking device I use now is an iPad app called "Debt PayOff Pro". I think it's $.99 in the App Store. Or at least it was a few years ago when I started using it. You plug in your debt snowball items, with their current balances, interest rates, and monthly payments and then you choose a payoff plan. This could be lowest balance first, highest interest first, or a custom set up. You can also add an "extra" monthly payment. For example, let's say in the fall, we teachers get a raise. I could keep my budget completely the same and just add my monthly raise to my snowball.
I prefer the app because it does all the work for me. I can add just $20 a month and it shows me how much shorter I'll be paying on a specific bill. You would be shocked at what $20 a month does in the long run.
Regardless of the method you choose to track your snowball, you have to track it somehow. Otherwise, you'll lose motivation when it comes to paying down your debt.
Alright...so that's your assignment for today! BUILD YOUR SNOWBALL!
Does anyone else think this is kind of fun, or is that just me?
Talk to you soon!