“How do I pay off all this debt?” “How the hell did I get here?” These questions have been asked since the dawn of time, since the first time one man lent another man money. It seems like a simple enough thing for us to wrap our heads around – if you have a debt, you pay it off. Simple, right? Yes, but that doesn’t mean that it is easy. If it were easy, there wouldn’t be so many people still in debt. Let me tell you a story.
Phil’s fight with debt
Years ago, there was a guy I knew named Phil. When he was nineteen, Phil worked in a furniture warehouse making OK money and doing fairly well for himself. He received a pre-approved credit card application in the mail one day. He didn’t really think anything of it. He just threw it away with all the other junk mail he got. Soon Phil started getting more and more of these applications. They were coming in from everyone, from Visa to American Express offering great deals; fixed APR for 12 months, airline miles, no interest for 24 months on balance transfers. But still, he didn’t really pay any attention to them.
Then one day, almost with a feeling like it was a rite of passage, he filled out one of these applications, i.e., slavery certificates, and within a week he was holding his first credit card. Oh the things he could do with it! He was halfway smart and knew he didn’t want a bunch of debt following him around so he used it, but he kept his balance low. Fifty dollars here, ninety dollars there, paying off the balance every month, he was doing well with it for a while. Slowly, but surely, a $150 balance would only get a payment of $75 instead of the entire amount. That’s OK, he’d just pay the rest next month with interest. Soon it was $375 and then $900. At least it was just one card. And he could definitely handle the minimum payments. A late payment raised his interest rate to 29% from like 8% plus the late payment fee. An expensive mistake.
A while later, when his balance reached around $1,600, he received another credit card offer with no interest for 12 months on balance transfers, so he filled that out and sent it in. No interest beats 29% for sure, so he transferred his balance to the new card. With a new baby and other bills piling up, Phil maxed out that credit card at $3,000, so he got another one. Not to just use whenever, but when he really needed it. Well, he really needed that one to the tune of about six grand. He knew he was slipping into debt slavery, his chains getting tighter and tighter. His 3rd card had about $1,200 on it by the time he heard about the Debt Snowball method from Dave Ramsey on his radio show.
The Debt Snowball
The Debt Snowball is a really good way to pay off multiple debts and here’s how you do it. You look at all your debts and find the one that has the lowest balance, $1,200 in Phil case. Don’t worry about interest rates or anything else, just the balance. Then you start paying as much as you can on that one while paying only the minimums on the other debts. Once that one is paid off, you will have a “win” under your belt and it will motivate you even more. This is the main reason you pick the smallest debt to pay off first, it’s a quick win.
Then take the money you were paying on the first debt, say $120 a month, and put that on top of your second lowest debt. With Phil, he was paying the minimum amount of $140 on his $3,000 debt. So he would add the $120 to the $140 and then he’d be paying $260 a month on that one until it was paid off. Next is the big boy, the $6,000 debt. He takes what he was paying on the last one, $260, and adds that on top of the maybe $200 minimum payment and now he’s paying $460 per month on the $6,000. Doing the math, he’d have it paid off in 13 to 18 months depending on his interest rate. That’s a lot better than the 10 years or so with minimum payments!
I haven’t spoken to Phil in a while, but he was paying down his debt like crazy when I last talked to him. I am sure he is either debt-free or almost there though, because once you get to the point he was at and then see how the Debt Snowball is working, you become almost unstoppable. Dave Ramsey calls it gazelle intensity. Picture a gazelle on the Serengeti running for its life with a cheetah at its heels. It will stop at nothing to get away from its pursuer. That is gazelle intensity.
I really don’t think that there’s a better method out there for paying off a bunch of debts than the Debt Snowball. That is why I mention it from time to time. I don’t think that Dave Ramsey invented the idea, but he has marketed the hell out of it and it’s helped probably hundreds of thousands, if not millions of people.
I’ll leave you guys with that. Don’t forget to subscribe to our blog to get new post updates and comment below to let us know what you think.
Until next time,