Thursday, February 20, 2014

Budgeting:: The Debt Snowball

The other day I heard a statistic from a co-worker that I thought was quite interesting and is what gave me the idea for this series of blog posts.  It goes something like this, “The average American with one credit card is $15,950 in debt”.  The scary thing about that figure is that it may not even include the debt they might have from things like student loans, cars, a mortgage, etc. YIKES!

We are lucky in that we don’t have credit card debt, but we do have some debt.  It's nothing extreme and is what I would consider a “normal” amount of debt for people our age.  However, it's debt and we don't want it.

Yesterday I talked about how our family budgets via the envelope system.  The budgeting we do allows us to use any “extra” money we have to be put down on the debt we owe.  A pretty simple concept if you think about it.  Dave Ramsey calls this concept the “Debt Snowball” and here’s how it works:

1.  List your debts:  List all your debts in order starting with the smallest balance (your mortgage is not included in this).  Don’t be concerned with interest rates unless you have two debts with similar payoffs, in which you would list the higher interest rate debt first. 

2. Attack:  Pay as much as possible to the first debt on your list.  This is where the budgeting sheet I spoke of yesterday comes into play.  The budget sheet will help you realize how much extra money you can put toward your debts.  While paying as much as you can on the first debt, pay only the minimum payments on your other debts. 

3. Repeat:  Once the first debt is paid off, you’ll now have more money to put toward the next debt. Over time, as you continue to payoff creditors, you will direct a larger amount of money toward each remaining debt.  This is point where the whole process really starts to move and you start seeing your debt decrease quickly. 

So then what do you do once you've paid off all your debts?   Here are the steps we plan to follow (Dave Ramsey’s “Baby Steps”)

1. $1,000 saved as Emergency Funds (Our personal opinion was to save more than $1,000 for an emergency, but others may disagree.  Either way, have something set aside just in case).

2.  Pay off all debt with the debt snowball {we are currently finishing up this step now!}

3. Save three to six months expenses in savings

4.  Invest 15% of income into Roth IRAs and a retirement plan.

5.  Save for College Funding

6. Pay off your home early

7. Build wealth and give

That’s the plan in a nutshell, we know it’s going to take awhile to get to step number 7, but we can’t wait until we’re there!  

With that, I think I hear the olympics, a cozy blanket and THESE delicious treats calling my name! See ya!