Dave Ramsey's Debt Snowball

Dave Ramsey promotes a method of debt reduction called the Debt Snowball. It is not the most financial efficient method available but Ramsey contends that for sound psychological reasons it is the method most likely to succeed.

The method works as follows. First rack and stack your debts starting with the smallest and ending with the largest. Let’s make up some numbers.

$500 Owed to store for new TV
$1,000 Credit Card A
$5,000 Credit Card B
$6,000 Credit Card C
$12,000 Car Loan
$19,000 Home Equity Line of Credit (HELOC)
$ 150,000 Mortgage

Please note that for simplicity I am not including interest in these calculations. A spread sheet as mentioned below would provide an accurate detailed pay off projection.

First, while making the minimum payments on all your debts, build a $1,000 emergency fund. Then take all the extra money you can afford on a monthly basis and go after the smallest loan first. Let’s say you can make minimum payments on everything plus $250 dollars per month. In two months the TV is paid for. Tape the receipt for the final payment on your refrigerator.

Next take the $250 and the $50 dollar minimum payment you were making on the TV and add it to the minimum payment on credit card A. In three more months Credit Card A is paid off. Celebrate your victory and tape another paid in full statement to the refrigerator.

Then take the $300 plus the $25 minimum payment you are making to Credit Card B. In 15 months the final Credit Card B statement resides on the refrigerator.

Then take the $325 and add it to the $50 minimum required by Credit Card C. In 16 more months another one bites the dust.

It is called snowballing because as you pay off each debt you have more money available to pay off the next debt, like a snowball rolling down a hill. Ramsey believes that extricating oneself from debt is 80% an emotional problem and 20% a matter of knowledge. He believes in going after quick attainable goals to build a psychology of success and willingness to continue when the going gets tougher.

There are snowball debt calculators that require Excel or an Open Office equivalent available on the web. I used a spread sheet to track my mortgage as I made extra payments to principal. It is reinforcing to watch the extra payments peel off the backside of the loan as you go after a reduction in principal. I expect these would aid in a debt payment plan using Dave Ramsey’s method.

Proverbs 15

[16] Better is little with the fear of the LORD than great treasure and trouble therewith.
[17] Better is a dinner of herbs where love is, than a stalled ox and hatred therewith.