When a snowball is your friend: A simple tactic to reduce your debt
That’s what happens when you have focused intensity and start with your smallest debt — it leads to a big result! — Dave Ramsey
My family is about to step into uncharted lands in the next 30 days.
After December 15th we will have zero credit card debt and no car payments.
This may not seem like a big deal to many. For us, it’s a big deal.
It represents a year and a half of prioritizing, planning, and executing those plans. Over the course of those 18 months we’ve paid off a significant chunk of debt — and below I’ll discusses how we got to this point and a tactic you might implement to move in this direction yourself.
Facing the reality — with an open mind.
At some point in the spring/summer of 2015, I found the Dave Ramsey Podcast. After the first few episodes, I thought that the callers who reported tackling huge amounts of debt were just fake callers. No way someone could reduce their debt by that much on the salary they had.
Or alternatively, I’d think they were bogus because they were able to pay the debt down only because they had large incomes and had the money to allocate to debt.
Looking at our debt — there was no way we could make this work. We are a special case — our debt was somehow different and the tactics Dave discussed wouldn’t work for us.
A kind of perverse “Lake Wobegon effect.”
This cynical mindset was a defense mechanism. It was simply a way for me to avoid taking a hard look at where we were at financially. And establishing the resolve to make it better.
Thankfully, after a month or so of episodes — the message did begin to sink in. I started reading personal finance materials on the web (Here, here, and here). I started thinking about advice I had given folks when I worked at Morgan Stanley about the power (or curse) of compounding interest.
Eventually, I brought the baby steps to Jolene for a discussion. Could we give them a try? Maybe we would see similar results.
We decided to give it a go and to keep an open mind.
Establishing a budget
You need a budget. Yes! You! Do! This is the mantra of one of my favorite companies and their flagship software: YNAB. (Stands for “You Need a Budget.”)
Once we had established that we wanted to start walking the baby steps — I quickly realized that having a solid budget and budgeting system would be critical to our eventual success (it has been!). We tried a number of different methods, and systems before settling into YNAB in December of 2015.
As I’ve mentioned before, what gets measured gets managed. Utilizing the simple, but powerful, YNAB budgeting tool allowed us to get a handle on where our dollars were going each month (YNAB rule number one — every dollar has a job). This gave us the information we needed to get baby step one out of the way. We dialed back where we could and in a short period of time — had our first little emergency fund of $1000.
Then the real work began — baby step two: Pay down all non-home debt.
Enter the snowball
There are numerous ways to pay down debt. Each has its own benefits and drawbacks. The two most common are both characterized by winter-based metaphors. The avalanche and the snowball.
The avalanche method is the purely mathematical favorite for paying down your debts. You look at the interest rates of each debt you have and while paying the minimum on all but the highest rate debt, you focus every penny you can squeeze out of your budget to pay down that highest interest rate loan.
The snowball method is similar in structure, just the order of debts is rearranged. With the snowball, you pay the minimum on all debts except for the debt with the smallest principal — regardless of interest rate. As Dave Ramsey notes, as this is his recommended tactic, this method takes advantage of human psychology. When we get small wins, we can find ourselves encouraged to keep at a project longer term.
Similar in each method — once a debt is paid off — you take the amount you had been paying to that debt and add it to the next one in line.
We choose the snowball. I can unhesitatingly recommend it to anyone looking to take on this challenge.
The snowball starts to roll.
We had a few smallish debts (store credit card, a small personal loan) and so after 2–3 months those were paid off. This gave us two wins and some excitement for what might actually be possible.
Next, we tackled our vehicle loans — those took a bit longer, but patience and sticking to the budget paid off (see what I did there?). After 8 or so months, we had the cars paid off. We also needed to buy another car (for me) during this time — and so we were able to “pause” the snowball for a brief period and paid cash for a used car.
The snowball was building up some momentum at this point and we turned to the credit card debt. This was the debt we’d been avoiding for too long. We had never missed a payment — but it sat out there like an over sized sweaty, smelly, monster — just mocking us.
The snowball crushes the monster
For the last 6 months, we’ve attacked that monster with every penny we could. We can now see the end of that debt coming in the next 30 days. The money is budgeted — the payment is scheduled. And we’re sitting — watching as this relic of many (many) short-sighted, impulsive decisions, gets crushed under the weight of our continually growing snowball.
I’m sure the feeling of seeing that zero balance will be wonderful. But I’m writing this post now because when we first started this process and worked out our first budget in the late summer of 2015, this moment seemed all but impossible. Certainly not probably in less than 3–5 years, let alone 15 months.
Even if something comes up in the next month and we don’t reach a zero balance in December, we’ve built a strong foundation these last 18 months and will “roll with the punches” as YNAB advises. We’ll crush this monster in the end.
Sure we still have outstanding student loans and a mortgage. However, I cannot stress enough how empowering it feels TODAY to know we are putting all those credit card interest payments behind us.
I’ll be talking more in depth about budgeting in the future. So stay tuned. The three-word version: Prioritize and execute.
PS. During the last few months, we’ve also refinanced our mortgage from a 30 year to a 10-year loan. This will save us nearly well over $10K in interest payments even if we take the full 10 years to pay it off. As we continue to walk the baby steps — our expectation is that we’ll have this paid off in advance of the 10 years — which will mean even more savings.
Thank you for reading. Have you started to attack your debts? Perhaps you’ve managed to avoid debt — what helped you stay out of debt? Want to make 2017 the year you start erasing debt? Let me know what strategy you’re going to implement.