We're Not Talking About Disco Balls Here!

Let's think about the debt snowball concept. You've heard the term before if you've ever listened to Dave Ramsey. But what is it really?

It starts with debt. Many people struggle with debt, especially what we call consumer debt or unsecured debt. For this concept, let's leave our primary home mortgage out of the conversation. In practical terms, the debt we want to focus our attention on includes credit cards, student loans, HELOCs (home equity lines of credit), 401K loans, etc. I recently worked with a couple who had all of these and then some.

To illustrate an example, let's assume you have a $500 balance on Visa, $1,000 on Lowes, and $750 on Kroger cards. Most people today tend to pay the minimum balance on all their consumer debt. When we do that, it will sometimes take 20 years or more to pay off the debt - not counting new purchases! And we pay way more in interest than we borrowed in the first place. So the debt snowball concept challenges us to think differently about debt.

Following this example, we would focus our attention on the $500 Visa balance first. Assuming we had at least $1,000 in the bank to cover emergencies, and after paying our other bills and minimum payments, we would put the rest of our budget toward paying off this one card. Let's say that was an extra $200 per month.

After 2-3 months, we would have eliminated the Visa card and be left with the Kroger and Lowes cards. Now we take the extra $200 + the minimum (let's assume $25) payment we were making on the Visa and we "roll" that onto paying down the next larger debt - in our example, the Kroger card with a balance of around $750 (it should be less than that by this time, since we made 2-3 minimum payments.). Now we take the $225 we were paying to Visa and load that up on top of the minimum (let's assume $40) payment to Kroger! So we're now paying $265 per month to Kroger to crush that $750 debt.

After another 2-3 months, the Kroger debt is eliminated. Now we take the $265 we were using for Kroger and add it to the minimum (let's assume $50) payment we've been making to Lowes. Now we have $315 each month to apply to the final debt - the Lowes credit card. Then in 3-4 months, we've crushed the last one!

In this simple example, we are able to eliminate $2,250 in debt in just 7-10 months with an extra $200 per month, using the Debt Snowball!

If You're In Debt, You're Not Alone

According to the Experian credit bureau, the average American household carried over $6,000 in credit card balances last year. Total money owed on credit cards totaled over $930 Billion! Total debt including mortgages was over $14 Trillion, according to the Federal Reserve.

So why worry about it? Because debt is a thief! It robs us of our money, it often robs of a good night's sleep, and more often than not it causes stress in our relationships.

But Why The Debt Snowball? Because it Works!

It's Motivational

When you pay off that first debt, you get a feel for victory! That sense of victory helps you build momentum to go after the next one, and the next one! It helps you build momentum.

It Provides a Psychological Boost

Each victory builds on the last one to help you stay focused on your goal of eliminating debt.

Delivers Quick Results

I've had clients who have masters degrees in economics, and they will argue to pay off their higher interest loans first. My point is always that if this approach worked for you, we wouldn't be talking right now...

Paying off the smallest debt first triggers the reward center in our brains, makes us feel good, and helps us stick to the plan.

Creates Accountability

I love seeing couples work this plan together. They often will take their one-page debt snowball plan and hang it on the refrigerator to remind them of their goal. When either is tempted to stray from the plan, the other is there to help them stay on course.

Many times, introducing a simple agreement to wait 24-hours before making a purchase will eliminate the impulse and help people stick to the plan.

Leads to Changed Behavior

Most people I work with have more than three non-mortgage debts to deal with.

One of the key benefits of the Debt Snowball is that it helps you build "muscle memory". When we achieve the smaller successes, we learn how to do it and experience what it feels like. This makes the next one easier to achieve. And the next one after that as well. Similar to what a basketball player would experience when practicing on the court.