Thursday, June 11, 2009

The Power of the Snowball – Part 2

Photo: patterbt

In Part 1, I shared with you an example of how to pay off your debt using Dave Ramsey’s Debt Snowball approach. Today, I’ll talk about some tools to get you started.

A few years ago, I first heard about Dave Ramsey and the Debt Snowball concept. I love reading financial advice books, and so I devoured every single one of Dave’s books. Yes…EVERY. SINGLE. ONE. (I have read all of Suze Orman’s books, too. No surprise, right?)

If you are serious about paying off your debt, I would suggest you read at least some of Dave’s books. Then, get to work - as Dave puts it - with gazelle intensity.

What can be gained by implementing the Debt Snowball?


Once you’re down to just a mortgage, you don’t have to worry about making monthly payments on several loans – especially in an uncertain economy. If you are a two-income household, you may even gain enough flexibility to consider scaling back and going down to one salary, if you chose to do so.

You can also gain the freedom to never have another car loan – EVER. Some people replace their cars not long after they are out of warranty, rolling their growing debt from one car to the next. As a result, every new car comes with a bigger and bigger payment. By keeping cars well maintained and driving them longer, you’ll continue to save the money you would have paid towards car payments and use it to pay for future cars with cash. Taking a bit of cash out of the emergency fund for minor repairs costs substantially less than a new car payment. Squeezing just an extra year or two out of your existing car once it’s paid off can make a significant difference.

Finally, implementing the Debt Snowball will give you a better understanding of the true cost of carrying debt. That $25k car loan will end up costing you over $30k when you factor in 8% interest over 5 years. Even more eye-opening: The $5k in credit card debt would cost you almost $8k if you made a $100 monthly payment over the next 6 ½ years…or worse yet, if you only paid $75/month, you’d pay over $10k (more than double the original debt!) in the 12 years it would take to pay it off!!!

The compound interest that works to your benefit in a savings account over time is the same thing that works to your detriment and makes it extremely difficult to pay off debt. This is particularly true with high, double-digit interest rate debt, like credit card debt.

Coming Up: In Part 3, I’ll wrap up this series by sharing how to find excess cash to apply to the snowball each month.

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