I’ve been reading the seminal Total Money Makeover by Dave Ramsey (got it at the library!) and I’ve also read reviews on his book at other sites, and I think I’m ready to try to implement the famous “debt snowball”. Dave Ramsey may be an Evangelical Christian and a Fox News supporter, but he has some great ideas and perspectives on living a debt-free life and successfully paying off debt and saving for the future.
Essentially, the debt snowball is a motivational tool for paying off debt from different sources. Sure, you could somehow consolidate everything through a debt consolidator, but by all accounts they are ripoffs. With the debt snowball, you line up your debts from smallest to largest and pay them off one at a time. You get the motivational benefit of crossing something off your list each time, and then the intention is that you keep paying at least the sum of all the minimums on each debt you are tackling, adding to the amount each time. He always mentions intensity and focus – you must be extremely focused at paying off more and more debt each time, earning extra money wherever possible and saving wherever possible.
So – I think I’ll try this. The first step is to list out all your debts in order, smallest to largest. I’m also going to include the interest rate where possible. Now that I was able to reduce the interest rate on both of my credit cards to 7.99% (YAY – that’s what follow-up will get you), I won’t need to prioritize one over the other in terms of paying off sooner. That, incidentially, is one of the main arguments agains the debt snowball – it isn’t logical. Logically, you should pay off the debt with the highest interest rate first. However, humans aren’t usually logical, so it’s possible that the motivational benefit of crossing small debts off the list is helpful. We shall see.
So – deep breath – here are my debts:
Banana Republic Store Card -$274.98 – APR 23.90%
IRS (unexpected charges from 07 that just came in) -$1,700 – APR unknown
Wells Fargo Visa -$6,842.59 – APR 7.90%
Citibank -$7,246.55 – APR 7.99%
Sallie Mae Student Loan -$35,000 – APR WAY TOO HIGH
Union Bank Mortgage – $600,000 – APR 1 MILLION PERCENT
To be updated…