My Debt Snowball

(Revised 1/18/09)

This is my second attempt at the debt snowball.  After posting the first one, I realized I left off a couple accounts by accident and I left the car loan off deliberately, since I was originally only going to focus on credit card debt.  I also left off my wife’s medical bill and my daughter’s band instrument that we are making payments on.

The plan with the Debt Snowball is to list your debts in the order you plan to pay them off. You pay them minimum payment on every debt except the one on top.  On that account, you pay as much as you can to pay it off as soon as possible.  When it’s paid off you add the amount you were paying toward it to the next debt on the list. As you pay off the accounts, the amount you are paying toward the debt on top of the list “snowballs” or grows larger.

Some people would recommend concentrating on the cards with the highest interest rate first in an effort to pay fewer finance charges.  I can’t argue with that, it sounds like a good plan. If you do the math, it’s the logical way to do things.

Others, like financial guru Dave Ramsey, say to list your debts from smallest to largest and pay the minimum on everything and all extra money goes to the smallest debt.  The reasoning to this method is that you will see progress sooner and that will help motivate you to keep going.  I like this too, because I need motivation.

Several of the cards have small balances now and I think we can knock a few of them out pretty quickly, but there’s one debt I plan to move to the top. The Care Credit card.

The Care Credit card is a card my wife opened to pay dental bills when my daughter got braces put on her teeth.  This card had one of those deals that gives you one year to pay it off with no interest added.  The interest accumulates each month and if you don’t pay it off, they add all the interest to the balance.  The accumulated interest is already at $177 and should be around $300 if it’s not paid off by July.  I’m moving this one to the top in an effort to get it paid before we pay any interest.  The others we will work from smallest to largest.  The two bank loans have set payment schedules.  The smallest one is paid directly from my bank account on a weekly basis and should be paid off in about 20 weeks.  The largest bank loan will pay off in 18 months.

Here is what my new debt snowball looks like:

As I mentioned earlier, I decided to go mostly from smallest debt to largest instead of worrying about interest rates.  I choose to do this for the following reasons:

1- Psychological boost of seeing debts paid off. I think as I see them deleted off the list, it’ll give me more motivation to keep going.

2- Simplify life.  When you have 20 credit accounts, plus a mortgage, utilities, insurance and cell phones, you end up with almost a payment for everyday of the month.  That’s a lot to keep track of!  I long for a simpler life.

3- Preparing for the worst.  Everyday I hear about companies cutting their work forces.  If my wife or I were to lose our jobs, we would fall behind on payments in a hurry.  I learned from experience that credit card companies can really hit you hard if you are late with a payment.  If I have too many accounts open, then I’m more at risk for late fees if we get in a bind.  So I feel it’s best to try to lower the amount of accounts, while I also save for an emergency fund.