The Debt Snowball

Since August, 2006, my wife and I have been able to pay off over $45,000 in debt. That's a lot! There are several things we did to make this progress.

Stop Borrowing Money

We cut up our credit cards and agreed that we would never borrow again. We've gone a year now without using credit cards, except for work expenses that were reimbursed. By refusing to borrow more money, all our steps are going forward; none backward.

The Snowball

Anybody who's remotely familiar with Dave Ramsey knows about the debt snowball. You take all of your debts, order them from smallest to largest, and start paying them off one at a time. You pay the minimums on all but the smallest one. For the smallest one, you find as much extra money as you can each month to add to its payment. Once the smallest one is paid off, you celebrate briefly then roll that payment into the next debt. Each time you pay one off, the snowball rolls over and you attack the next.

The reason you go smallest to largest (and ignoring interest rates) is so you can experience some victories. Going through this process is largely behavioral. If you have that satisfying feeling of paying one off, it motivates you to keep going.

Our extra snowball amount at the start was a few hundred dollars. We started with Care Credit which was zero percent, but the smallest amount.

Whole to Term

For many years, we had been paying into whole life insurance policies. At the time, it was sold to us as a way to take care of our need for life insurance as well as an investment for college for our kids. We paid $250.00 a month into this, and our balance last year was a total of about $15,000. That's not much of a return. We applied for term life policies and when they were approved, we canceled the whole life policies and took our $15,000 out. That money was applied to our debts, smallest to largest. By the time we did that, we had knocked out the first four debts and part of the fifth.

Sell Stuff!

Another tactic is to sell stuff. I had a 1966 Mustang Convertible sitting in my garage for years. I LOVE old Mustangs, but at this point getting out of debt is more important than having an old car in the garage. We sold it, netting us another $9,000.

The Dreaded Car Payments

I was driving a BMW that I owed about $20,000 on. A lot of times, Dave will say "sell the car!" I didn't have enough extra cash around to buy another car that I could use for my job, so instead of just selling it, I traded it in on a 2004 Ford Taurus. The car dealer thought I was nuts, but there was a method to my madness. I went from a $20,000 debt and a $515 payment to an $11,000 debt with a $250 payment. That freed up almost $300 a month to apply to the snowball, and reduced our total debt by almost $10,000. I love the Taurus and can't wait to pay it off (4 years ahead of schedule, by the way!)

FOCUS!

I love that my wife has been equally focused on this process as I have. We've both been very motivated to become debt free. There have been times when we've had extra money that we could have spent, but we've supported each other and have applied the money to the snowball.

IT'S NOT EASY!!!

We are now putting our snowball on hold. We have some things around the house that need to be taken care of, and we are not borrowing money to do them. We will save the cash to take care of these things and then resume the snowball. We know it will take a while – about three more years – but we know it will be worth it.

FOR MORE INFORMATION: Please see Dave's web site (www.daveramsey.com) for more information about the Financial Peace program. If you want to learn more, buy a copy of "The Total Money Makeover." That book gives you all the information you need to get started.