Some financial experts recommend that the best and most practical way to tackle debt is to pay those with the highest interest rates first. This way, you don’t have to pay as much on interest. But for Dave Ramsey, author of Total Money Makeover, the secret towards becoming debt-free is to have “quick wins” by paying off the smallest balances first. He called his method as the Debt Snowball.
In the Debt Snowball method of getting rid of debt, you are asked to list all your debts (excluding the house) in order with the smallest balance first. Then once you already have this list, Ramsey says that you “pay the minimum payment to stay current on all debts except the smallest.” As for the latter, you are supposed to pour forth all your efforts in paying it completely until you have no remaining balance left.
Then, once that debt is fully paid, you move on to tackle the next debt on your list. Using the payment from the first debt and other extra monies you can find, you pay off the second debt. The same strategy is given for the third debt on the list, except that you now use the money you used to pay for the first and second debts and use that and other monies you may be able to raise to pay for the next debt. The same strategy is applied to all debts in the list until you have paid all your creditors completely.
What makes the Debt Snowball effective is that it boosts your morale when you see that you are actually making progress. No matter how small a debt you have just completely paid off, the sense of fulfillment encourages you to continue with your repayment scheme. Because you see that it actually works, the Debt Snowball gives you motivation to keep on going.
For this strategy to work, Ramsey reminds readers that they must stop borrowing. It makes sense. If you just continue to use your credit cards while working on the Debt Snowball, chances are that you’ll be snowballing perpetually. If you keep on paying off your debts, you’ll never get around to building your nest egg. It’s very important to stop using plastic while you are snowballing to ensure the greatest chance of success.
But what if you still can’t find the cash to start your snowball rolling? Ramsey says it’s time for so some drastic action. “You have to dynamite it. You have to get radical to get the money flowing again.” What are these radical steps you need to do to get the cash for your Debt Snowball?
The most obvious one is to start selling stuff you don’t need and yes, even the stuff you feel you need but can’t afford to have. Go through all the things you have and you’re bound to find something you can sell. Books, clothes, shoes, a piece of furniture, jewelry collection—whatever—all these can be converted to cash by holding a garage sale or auctioning them over on the Internet. But no one would want all my stuff—they’re worthless! We'll, always keep this inspiring quote in mind: One man’s junk is another man’s treasure. Remember, eBay started when founder Pierre Omidyar sold a broken (yes, broken) laser pointer for $14.83 on his site previously known as AuctionWeb.
Should you sell your home or your car? Ramsey only recommends selling the home if you “have payments above 45 percent of your take home pay.” For most families, the home is not the root of all money problems and does not have to be sold. As for the car or other vehicles you may have, the Total Money Makeover recommends: “If you can’t debt-free on it (not counting the home) in eighteen to twenty months, sell it.”
If you don’t have anything to sell or what you sold just wasn’t enough to get your Debt Snowball rolling, you can also take another radical step: Find ways to increase your income. This can mean working overtime or finding a second or even a third part-time job. It doesn’t matter Working long hours and feeling sleep-deprived for what seems like an eternity can be done temporarily—just for the time-being when you are paying off your debts. You can ease back into a more relaxed lifestyle (and feel truly stress-free) once you have taken the burden of monthly payments from your shoulders.
Those who have resolved to get themselves out of debt and be on the road towards financial stability by doing what it takes to legally augment their income in various ways find that despite the pain of parting with a beloved possession and/or the tiredness of mind and body felt after doing ten straight hours of work, they are energized. The inspiration comes from knowing that they are doing this for a reason. They know that they are going to face a better and brighter future not only for them but for their children as well when they have unshackled themselves from the chain of debt.
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