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  1. #1

    Post Has anyone here heard of "debt snowballing"?

    I was talking to someone today and they mentioned this method of paying down debt called debt snowballing. The way they explained it to me was that you pay more on the lowest debt until you finishing pay it off (you would still be paying down on your other debts of course). Then you take the money that was applied to the debt that you just paid off and add it to the next debt and so on until all of the debts are paid. They said that it would work very well for credit cards.

    Just wanted to know if anyone here has heard of this method of paying down debt or if someone has used it?

    TIA,
    rwmtd

  2. #2

    Default Re: Has anyone here heard of "debt snowballing"?

    I have. Dave Ramsey of www.daveramsey.com is a big proponent of this. I have 2 of his books and listen to him on the radio from time to time. He advocates this:

    1. First, before starting the snowball or any type of debt reduction plan, put away $1k emergency fund and it can't be in a CD or stock, it must be liquid i.e checking/savings account. His reasoning is that something always comes up whether it be that your brakes or batteries go out, or the water heater in the house bursts or whatever, one must be ready to have readyily available money to pay for lifes little bumps which is one of the main reasons why people get derailed from their debt reduction plan.

    2. He does not believe in paying the highest interest rate card first which some financial people advocate. I agree with him. His reasoning is that people need to see what they are working towards and when they can see that they just paid of that $300 Orchard Bank credit card, it provides a psychological boost. He says to pay the minimum on all the other credit cards and then pay the most that you can afford on the smallest credit card balance.

    When you have paid that off, eg if you were paying $50 on Orchard Bank, take the $50 and apply it along with the minimum payment of the next smallest balance and so on and so on.

    This is a good plan. However the rest of his teachings, I don't really subscribe to. He advocates NO credit cards only a debit card. He advocates paying by CASH/CHECK/DEBIT card only. He says not to worry about a FICO score.

    He advocates not purchasing a home with a payment more than 25% of your income. I don't know where that situation exists for most people. He does advocate tithing and he is a Christian which is perfectly alright with me.

    He says that most people are living above their means and if you have financial problems and the creditors are callling, get a second job, eat rice and beans and don't let the collection agencies bully you. He calls them bottom feeders. He says, never , ever, ever, give them access to your checking/saving account and get everything in writing.

  3. #3

    Default Re: Has anyone here heard of "debt snowballing"?

    Here's the definition for debt-snowball:

    The basic steps in the debt snowball method are as follows:

    • List all debts in ascending order from smallest balance to largest. This is the method's most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.
    • Commit to pay the minimum payment on every debt.
    • Determine how much extra can be applied towards the smallest debt.
    • Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
    • Then, add the old minimum payment from the first debt to the extra amount, and apply the new sum to the second smallest debt.
    • Repeat until all debts are paid in full.
    • Some lenders will apply extra amounts towards the next payment. Be sure to contact them and tell them you want your extra payment to go directly toward the principal.

    In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name). The theory works as much on human psychology as it does on finance; by paying the smaller bills first, the individual, couple, or family sees fewer incoming payment requests as more bills are paid off, thus giving ongoing positive feedback on their progress towards eliminating their debt.
    All retirement contributions are to be halted during the debt snowball, thus freeing up more money to pay down the debt snowball. Many dispute this practice, citing the cost of compounding interest to be greater than the gains of paying off debt. Some compromise by reducing retirement contributions to only what a company will match with an employee. Many financial and wealth experts teach that this halting of retirement contributions should last no more than two years.
    A first home mortgage is not generally included in the debt snowball, but is instead paid off as part of one's larger financial plan. As an example, many financial plans pay off home mortgages in a later step, along with any other debt which is equal to or greater than half of one's annual take-home pay.



    Source: Wikipedia;http://en.wikipedia.org/wiki/Debt-snowball_method

  4. #4

    Default Re: Has anyone here heard of "debt snowballing"?

    Great thread guys!

    Hey HJM331, that is the only way I have heard of it also. You both are actually correct.

  5. #5

    Post Re: Has anyone here heard of "debt snowballing"?

    HJM331 and Shark6 thanks for the information. You all are fast. Shark6 if you don't mind me asking what are the titles of the books that you have by dave ramsey.

    I like this debt snowballing theory and I think I would like to get going with this soon.

  6. #6

    Default Re: Has anyone here heard of "debt snowballing"?

    One of them is :

    The Total Money Makeover

    I forgot the name of the other one but I purchased it during a holiday weekend for $10 each. In fact, I'm pretty sure that he has a sale now as it seems that every holiday weekend, you can get any of his books for $10. It's a simple read with sound principles.

    I take most of what he says and discard the rest. However, if you are looking for a total debt free way of life, his books/philosophy is for you. If you are looking to pay down your debts and do it fast where you can see quick results, then he is your guy and the debt snowball is the way to go.


    I intend to do a modify debt snowball. I would like to get all of my cards at 30% and then go back and work on them lower.

    www.daveramsey.com

  7. #7

    Default Re: Has anyone here heard of "debt snowballing"?

    This is the core of his philosophy: The 7 Baby Steps

    Now its your turn! Use the Baby Steps to get your finances in order and on track. Then pass them on to someone you know and help change their life!
    $1,000 to start an Emergency Fund
    Pay off all debt using the Debt Snowball
    3 to 6 months of expenses in savings
    Invest 15% of household income into Roth IRAs and pre-tax retirement College funding for children
    Pay off home early Build wealth and give!
    Invest in mutual funds and real estate


    Also, I checked the website and he is having the $10 book sale. The other book was Financial Peace

  8. #8

    Post Re: Has anyone here heard of "debt snowballing"?

    Shark6, thanks for the name of the book and I will be ordering it this weekend for sure. From what I see so far I think I can follow along with some of this philosophy.

    Again I would like to say that I am so lucky to have come across this website everyone here is so amazingly helpful.

  9. #9

    Default Re: Has anyone here heard of "debt snowballing"?

    Quote Originally Posted by shark6 View Post
    This is the core of his philosophy: The 7 Baby Steps

    Now its your turn! Use the Baby Steps to get your finances in order and on track. Then pass them on to someone you know and help change their life!
    $1,000 to start an Emergency Fund
    Pay off all debt using the Debt Snowball
    3 to 6 months of expenses in savings
    Invest 15% of household income into Roth IRAs and pre-tax retirement College funding for children
    Pay off home early Build wealth and give!
    Invest in mutual funds and real estate


    Also, I checked the website and he is having the $10 book sale. The other book was Financial Peace
    The 7 baby steps seem pretty reasonable to me. I will have to look into it also

  10. #10

    Post Re: Has anyone here heard of "debt snowballing"?

    Shark6, I brought a copy of Dave Ramsey's Total Money Makeover and a copy of Financial Peace. I am going to be making my first $1,000.00 deposit at the beginning of next month. Both copies were $10.00 each and I think a good investment. I've been reading the Total Money Makeover for two days now. One of my friends even gave me a link for a spread sheet that works out different scenarios for paying down the cards using a set amount every month.

    I'll be making updates to this thread from time to time with my progress!

  11. #11

    Default Re: Has anyone here heard of "debt snowballing"?

    Good for you! I have those two books and I listen to his radio show from time to time at work.

    I don't subscribe to everything that he says but most of his principles are sound. I do believe in tithing, living within your means, the debt snowball, having an emergency fund etc I also agree with him re purchasing a late model car and not a new car which depreciates right when it is driven of the lot.

    OTOH, I do believe that one should have a few credit cards and work on your Fico scores. He believe that everything should be paid by check, cash or debit card and that one doesn't need a Fico score.

    Keep me posted on your journey.

    p.s. He gives sound advice re collectors which he calls, 'the scum of the earth'.

  12. #12

    Default Re: Has anyone here heard of "debt snowballing"?


  13. #13

    Default Re: Has anyone here heard of "debt snowballing"?

    Quote Originally Posted by shark6 View Post
    Good for you! I have those two books and I listen to his radio show from time to time at work.

    I don't subscribe to everything that he says but most of his principles are sound. I do believe in tithing, living within your means, the debt snowball, having an emergency fund etc I also agree with him re purchasing a late model car and not a new car which depreciates right when it is driven of the lot.

    OTOH, I do believe that one should have a few credit cards and work on your Fico scores. He believe that everything should be paid by check, cash or debit card and that one doesn't need a Fico score.

    Keep me posted on your journey.

    p.s. He gives sound advice re collectors which he calls, 'the scum of the earth'.
    You guys are making me want to go and buy the book. Seems like his info would be great to share with members here regardless if they were newbies or O-G's

  14. #14

    Default Re: Has anyone here heard of "debt snowballing"?

    Is this book also available on DVD?

  15. #15

    Default Re: Has anyone here heard of "debt snowballing"?

    6/17/2009

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