Debt snowball

Let me be blunt, I don’t think you can be a minimalist if you don’t attempt to be debt free. I have been learning even more about minimalism since my divorce. I really kicked it into gear since I got to keep and track every dollar I ever made and I didn’t spend any money on frivolous stuff.  

Because of the divorce, and the fact that I wasn’t making as much as I was making at my last job, I went into a small debt. Oh, and I found out that my ex left me with a 5 grand surprise debt (thanks honey!).

You could save and get rid of debt. That’s if your income is high enough and you can lower your expenses. However, for most people that’s very hard. For some, their expenses are as low as they can be, their income is as high as it can be, and still they just can’t seem to pay off their debt.

There is a very good book by Dave Ramsey that explores this problem. On this post, I will be exploring one of the concepts in the book. This concept is called The Debt Snowball.

Basically the principle is to list ALL your debts from smallest to biggest and write down your minimum payment on each debt.

Eg:
Misc. 2,000 mp 100 (min.pmt)
Home 5,000 mp 150
Car 8,000 mp 250
Credit cards 15,000 mp 300

This sample person, owes a total of 30,000, and let’s say this guy can only pay 1,000 per month. That means that this guy will pay off his debt in at least 48 months with interest. It looks simple enough, but if your expenses are high and your payments are low, it’ll seem like nearly impossible to get rid of your debt and you’ll feel like you’ll be in debt for the rest of your life.

The debt snowball by Ramsey is simple enough to understand, but hard to put into practice because it makes you restructure your life, but let’s face it, if you’re in debt, your life really needs to be restructured.

Ramsey talks a lot about the 7 baby steps, that’s because you cannot change everything overnight, because if you could, you wouldn’t be in debt at all, you’d be able to re-orient your life in such a way to keep yourself out of debt.

So, these baby steps are detailed in the video at the bottom of the page. But I’m going to focus on baby step #2, the debt snowball. The debt snowball focuses on paying the minimum payment on all your debts, but put more on your smallest debt first, making the biggest payment possible and reduce your small debt first.

So, what will this sample guy do first? What do we pay off first? And the answer is, we pay off the smallest debt first. “Then we dance around the kitchen, not because you paid off a debt, but because you’re finally taking control of your money” says Ramsey.

With regards to our sample guy, his 4 minimum payments on all debts are as follows: 100+150+250+300 = 800. That’s how much money you’d spend on minimum payments. But let’s say your budget allows you to pay 1,000 a month toward debt. Paying 200 extra doesn’t seem like it will make a huge impact on your debt, but the snowball grows with time. The remaining extra 200 would go toward the smallest debt, so your payments would end up like this: 300+150+250+300 = 1,000. When you pay off your smallest debt, you move to the second debt payment.

Now we have 3 minimum payments of 150+250+300 = 700, but we can pay 1,000 dollars a month, we put the extra 300 toward the smallest debt. 450+250+300 = 1,000. I used to do this when I was married to pay off the car, short term savings, long term savings, life insurance, car insurance, and other loans. I would set it up so it would come out of my paycheck automatically, so there was never a way to not pay off my debt and savings, of course sometimes I would find myself with no cash to spend, but I was really good at paying off my debt.

When our metaphorical guy pays off the second debt, he’d do another victory dance and he is left with two minimum payments 250+300 = 550, but remember, our debt payment budget is still 1 thousand, so we put it toward the smallest debt. Our new payments would be like this: 700+300 = 1,000.  We do another victory dance and we move onto the last debt.

When we only have one debt left, we put the entire 1,000 toward that last debt until you’re done.

That was hypothetical, just so I could explain how The Debt Snowball works. Now let’s move to real numbers.

I have 3 debts:
Personal Loan: 4,000 mp 200.
Home Security: 9,000 mp 800.
Ex-wife’s surprise debt: 4,900 mp 200.
____________________________
Grand total of 17,000 and minimum payments of 1,200.

I did it before and I’ll do it again this time. I’ll put all my stuff here and I’ll keep you posted on my progress.

First to pay off, the Personal Loan. I can pay 2 grand a month, maybe more, but for now, I’ll keep it at 2,000. Before the snowball, my minimum payments are as follows: 200+800+200 = 1,200. But being able to pay 2,000 a month, I’ll take the extra 800 and put them toward my smallest debt, which in my case is my Personal Loan, so the payments are now like this: 1,000+800+200 = 2,000

After the personal loan is paid off here in a few months, I’ll do a victory dance and move onto the next debt: The home security thing.

My minimum payments  would then be something like this: 800+200 = 1,000. So I would put the extra thousand into the home security thing. 1,800+200 = 2,000. When it’s paid off and after another victory dance, I’ll put the entire 2,000 toward my ex’s surprise until it’s done. When I finish it all off, I will treat myself to a debt free dinner.

The reason I can make 2 grand a month payments, which I couldn’t do when I was married, is because my expenses were so high back then, I only had little money left at the end of every month. Now that my expenses have been extremely reduced, I can now make payments of 2-3 grand a month, maybe more.

I still have my savings’ account intact, however, I fell behind for about 3 months. Now I need to make up for the 3 months I didn’t put money into it. I’ll be keeping you updated.