Once we laid out our budget and saw precisely what we had coming in and going out we were ready to plan our attack. And it really is an attack. If you’re going to change your money story you can’t face debt with the same mentality you had getting into it! That probably deserves a post of its own…
The Snowball Method
After surveying the landscape of debt payoff plans, the one we felt the most resonance with was Dave Ramsey’s approach. He promotes a plan known as the Snowball Method to pay down debts in order of their size, smallest to largest. This means that you end up paying off some small loans relatively quickly so that you can build momentum (as well as a belief in a debt-free future!). Not all finance gurus recommend this route. Some say you should pay off the loans with the highest interest rate first because you’d be saving some money on the interest in the process. Here’s my 2 cents about why we nixed that approach: Humans are emotional creatures and emotional buyers. It seems unlikely that I’ll stick to a rational plan for paying down debt when being irrational about money was what got me into debt in the first place. I need a plan that’s going to work with my tendencies and my emotions, not against my nature.
The Snowball is about getting lots of progress made relatively quickly. After a couple months perhaps one small loan is paid off and you’re nearly done with a second. You feel like you’re winning! But if you were going about it by paying down high interest rates first, you might not pay anything off for years! As you can guess, the name for the Snowball Method comes from the momentum you build as you pay down the smaller debts, working your way up to the larger debts. By the time you get to the big school loans or whatever is biggest in your list you have ingrained the habits that keep you focused on your goal so you’re less likely to diverge from the plan when the emotional highs of paying off a loan or two or three isn’t happening as frequently or at all.
Here’s what our snowball looks like right now:
- Couch: $500
- Local Credit Union car loan #2: $3,016
- Bachelors degree-Natanya: $3,316
- Chase Southwest credit card: $5,330
- Chase car loan #1: $12,293
- Culinary school-Simeon: $21,500
- Masters degree-Natanya: $5,790
- Bachelors degree-Simeon: $32,00
Ok so there’s one caveat. The reason my masters loan is out of order is because we are paying zero interest. I felt I had to take advantage of the zero percent. I may be an emotional spender, but I can also see opportunity when it is this obvious!
Given our current income, we crunched the numbers and expect that if everything stays the same, we will be paying our last debt payment at the end of 2021, or about four years from the date of this writing.
If we keep up the pace, we could even pay off the house in 15 years! Wouldn’t that be incredible? Debt free and without a mortgage payment?
We are allocating about $250-300 extra towards debt each month but already I’m finding it to be a big stretch. My car needed new tires this month plus some additional maintenance, Simeon needs a new proper winter coat, we need to purchase cross country plane tickets soon, and there are small updates we want to make to the house to make it more functional for us.
But it’s exactly this kind of statement that encourages me in some way too. I want us to have the money we’re paying to the debt back in our pockets so that these kinds of expenses feel enjoyable, not stressful.
I’m trusting that if we keep our goals ambitious, it will be more likely that we will hit them. If we slightly miss the mark but make good progress, hopefully we will still feel like we’re winning the long game.
What do you think? Should we set goals we know absolutely 100% we will hit? Or be more ambitious? What works for you?
More posts about our journey to becoming debt free here.