Tuesday, September 2, 2008

Back to Basics Part 6 Does it Matter How You Snowball?

If you are just finding the Back to Basics series you can find all of the posts in the series by clicking on “Back to Basics” in the sidebar. So far we have discussed tracking our money, finding money in our budgets, saving for an emergency fund, and things to do before you start repaying your debt.

The next item up for discussion is the Debt Snowball. This can be quite controversial. There are diehards on both sides of the coin. I will give you a brief synopsis of what each “side” is, and which to choose based on your personality.

The Dave Ramsey Method
For either method you will need to be able to list all of your debts. For this one list them in order from smallest debt to largest debt. You don’t need to worry about the interest rate. So, let’s say your first debt on the list is a hospital bill for $150. You are paying all the minimums on all of your other debt until it is that one’s turn on the list. So, all cards are being paid at the minimum but on this debt you happen to have “found” $150 a month in your budget so month one of your snowball you pay this bill and it is gone… poof!! Next month you start to pay your gas card. You owe $500, your minimum payment was $15 a month, but NOW you have the $150 of “found” money so you start paying $165 per month. Once the gas card is paid off you take that $165 and add it to the next debt on the list.

Who is this for?
This is for the person who needs to see progress to stay motivated. By paying off the smallest debts first you feel a sense of accomplishment. As you are able to cross more and more debts off the list you get even more motivated and start selling baseball cards and other junk to add the money to your debt payoff.

The Dave Ramsey Doesn’t Know Math Method.
Obviously the way to save yourself money on interest is to pay the debt with the highest interest rate off first. Now, I still would pay of things like hospital bills first because if you don’t they will be sent to collections. So any bills like that I would still pay immediately. But, let’s say you don’t have any of those. You have a car payment of $500 a month and you accepted an interest rate of 13% on that car. This is your highest interest rate and you still owe $20,000 on the car…. Ouch. So, you add your $150 of found money to the car payment and are now paying $650 a month. When you finally pay off this car you go to the next highest interest rate 10% on a credit card which now only has a balance of $1000. So you are paying $650 plus whatever your minimum payment was. This method will get you out of debt a little faster and will save you a little money. But, like I said, it may not be for your personality.

Who is this for?
This is for individuals who have strong will power. Even though you will not see a lot of progress at first you are able to keep in mind at all times that in the end you will save yourself some money and time. But, how much? I can tell you exactly….

Here are my debt stats paid off using both methods, however I had to change my interest rates on a few items because believe it or not my debt lines up smallest debt has highest interest and my largest debt has the lowest rate. (In other words if I didn’t change the interest rates they would both be equal.

Dave Ramsey Method
Debt will be paid off in 61 months.
Total interest paid $7163

Dave Ramsey Doesn’t Know Math Method (I got that term from Five Cent Nickel)
Debt will be paid off in 61 months
Interest paid $7100

So with the more mentally draining second method I only save $63 in interest. That is enough for me to say I will go with the more motivating technique.

So, there you have it. Your next step is to begin the debt snowball. You may think since this is going to take a while you need to stop reading the Back to Basics series. However, next week I will tell you how to get your debt paid off even faster.

I used the Dave Ramsey Debt Snowball Calculator to get my results. This is something I purchased from his website.

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