Monday, February 11, 2013

The Grrouchie Debt Snowball

A couple of days ago I made a post about how I have recently reached a multi year goal of becoming debt free.  I then made a follow up post where reader dD asked me what my "snowball" method was as the one promoted by Dave Ramsey was not a "free" thing as he wants you to buy his books and whatnot.

dDFebruary 11, 2013 at 4:37 AM

grrouchie, you mentioned previously about a plan similar to Mr R's "debt free snowball" .. is yours a free plan ? professional, DIY or otherwise ?
I ask because I note that Mr R's "snowball" is not free !!
(wow an American wanting to charge me for odd that this surprises me !)

The reality of it is that it's a quite simple plan.  It has a lot in common with Dave Ramsey's plan and others that I have read since.  The plan itself is not the hard part, the hard part is figuring out your budget and actually sticking to it.

You see, when I first decided that I was going to get out of debt I had my work cut out for me.  I was drowning in extra payments that I was having to make every month and one day I sat down to do my bills and actually looked at the amount of interest that I was paying every month.  That is what sickened me enough to actually make the decision to pay everything off and stick with it.  Interest is a killer.
One of my credit cards (the one with the largest balance) had an interest charge of over $200 per month that I was paying.  And, because I couldn't accord to do more than just the minimum payment my balance wasn't shrinking fast enough to make any kind of difference what-so-ever.

The following is my information as I remember it best.
I made a list of all of my debt.
  • Bank of America Credit Card.
  • AT&T Credit Card.
  • Discover Credit Card.
  • Sam's Club Credit
  • Lowe's Credit
  • Best Buy Credit
  • Student Loan Number 1
  • Student Loan Number 2
  • Car Loan
So, then I organized my debt in terms of which lines of debt had the biggest balances and which had the smallest.
I made the minimum payment on every single one of the above and at the end of the month, whatever money I had left over went towards the debt with the smallest remaining balance.
Once the smallest was paid off I rolled everything over into the smallest of the remaining.
Repeat this process until you are left with just one remaining debt and you are pouring all of your available resources into it every month until it is eradicated.

The funny thing is that the above is the easiest part.  Sorting your bills, paying extra if there is left over money, rolling it over to the next bill, etc.
The hard part is developing the discipline to actually do it month after month and year after year.
The devilishly hard part is being willing to cut out other expenses in order to free up more money so that you can put more money towards your debt.

Dave Ramsey has a saying that I really love.
(paraphrased) You have to be willing to live life like no other right now so that later you can live life like no other.

Basically it boils down to this.  Stop having fun until your debt is gone.  Cut your cable, cut your eating out, cut your entertainment budget and just spend all of that money on your debt.  Once the debt is gone you'll be free to do whatever you want with your money and you'll have a ton more money to do it with.  You will be free.

Over the course of the 3 or so years that I was eradicating my debt there were times when I did more than I should have and didn't pay as much as I could have towards my debt. I consider them moments of weakness, I am only human after all.
However, much like dieting or any other addiction (and spending can be an addiction) you will have moments where you fall into your old routines and habits.  It's picking yourself back up afterwards and getting back on track that defines you.
This is what has kept me going for the past few years and this is what is keeping me going in my weight loss struggles.  Sure I've dropped nearly 60 pounds at this point (by next week I hit this goal!).  But there are months where I lose nothing or gain a couple of pounds and I really want to give up.
There are weeks where I have fast food 3-5 days and just want to stop eating the salads and tracking my Weight Watchers points and just go to the store and buy a few bags of chips and some ice cream and other such nonsense.  However, I saw that by continuing the struggle with my finances - even after a bad episode or two I could get back on track and eventually accomplish my goal.
Thus, with my weight loss, even after a bad day or week I no longer have an issue getting back on track and trucking towards my next milestone which, by the way, will be hitting 240 pounds by Sunday.

Yes Cheryl Crow, every day is a winding road.

I'm no expert in finances or weight loss, I just developed the motivation to put the effort into getting where I want to be and making the sacrifices to get there.
If I can do it everyone can.


  1. "So, then I organized my debt in terms of which lines of debt had the biggest balances and which had the smallest."

    While there may be a psychological advantage to this, it is absolutely not the most fiscally efficient approach.

    Instead, sort your debt by interest rate. Get rid of the expensive debt first. Why pay off a 3% mortgage if you have a 7% car loan? Why pay off a 7% car loan if you have an 18% credit card loan? Why pay off the 18% credit card if you have a 24% credit card balance, too?

    1. I do not disagree.
      However - Usually Mortgage will be largest balance and thus regardless of interest rate will be the last.

      Also - I saved my Student Loan for last precisely because it had the lowest interest rate (I kind of forgot that I did that until reading your reply).

      The psychological effect of being able to rid yourself of one or two pieces of debt should keep people going. It's a triumph!
      I know that for me it was a way to stay motivated early on. Each time a debt fell I knew I was doing the right thing and this would be worthwhile in the long run, whereas if I went purely by the interest rate method you are describing I might not have lost some of my debts nearly as quickly and might have given up.

      The truth is that when looking at the amount owed and the interest rates, you'd have to run a comparison going each way to see which makes more sense, and in fact a combination of the two methods is probably more ideal for someone willing to take the time and over-analyze it.

  2. That's a link to Dave Ramsey's 7 baby steps to becoming debt free. It's free to look at the steps and a small definition/reason for each one. I'm trying to follow it, but lately it seems like there's been too much happening that requires getting into the emergency fund. However, I will be using part of my tax return to pay off my 2 credit cards(each with a small balance under $500) and build the emergency fund up a little. Once that's done, I have my student loans(which aren't currently required to be paid on as I'm still in school) and my mortgage. I am working on saving more as I know eventually I'll need a newer vehicle, but hopefully not for a year or 2 at least. Congrats, groucchie!!!! Hopefully I can eventually get to the point that you're at.

    1. Cokeboy - I know you can do it.
      And, my journey included a few large loud belches along the way - like an Engine Freeze that was larger than my emergency fund, etc.

      However, it's all a matter of getting back on track when you've been derailed.
      My tax return definitely helped as it paid off my last bit of Credit and a large portion towards my school loan.

      Next time you're in Vegas I expect you to be debt free and we'll drink to freedom!


    2. I might not be debt free next time I'm in Vegas, but I definitely want to meet up again....You have some $$$ of mine that I wish to reclaim!! lol

    3. I can accept that.
      I need to start a page for how much I'm up or down against visitors.

  3. I was going to comment about paying the highest interest debt first, but Mr Anonymous beat me to it.

    The other point I was going to make was would it have been possible to organise a cheaper-interest-rate loan at any point in the process? Credit cards are a very expensive way to borrow money. A personal bank loan to pay off the credit cards might have been cheaper.

    Anyway, congratulations on shifting the debt.

    1. This is another good thought as well.
      Once which I just recently helped a friend out with. He took out a lower interest loan and put all his credit on it - going to save a ton of interest in the long run by doing it this way.

    2. Another suggestion, when possible, is a mortgage re-finance or home equity loan, which are always lower interest rates, if you have enough equity in your home to do so. Also, the discipline to pay the loan off and not rack up more credit card bills must be there, or it will just make things worse.

    3. Yeah, I've got to build up some equity first, but good idea

    4. No, bad idea (the home equity loan, that is; refinancing mortgage is fine, if you get the right parameters). You don't put your home at risk, or at more risk than it already is. In case you have some horrendous emergency that depletes your ability to keep making payments, defaulting on unsecured debt doesn't leave you homeless. Defaulting on your mortgage or a home equity loan might. That makes all the difference in the world.

    5. If I can just win one big tournament this summer during the WSOP I'll just pay the blasted thing off and truly be debt free.

      Yeah - pretty simple solution there.

  4. nice post grrouchie, thanks for taking the time and effort, appreciated.
    your post is littered with, but oh so blindingly obvious, salient points ! now that you've "opened" my eyes, I just need to keep my eye on the ball, so to speak.
    "Stop having fun until your debt is gone." ugh, strike !!

    1. Haha...
      You know, it's a horribly difficult step to take but in the long run it's worth it.

      I've got a lot of catching up to do from the early years that I've wasted. I'm now 36 and barely have anything saved up for retirement because I never had enough to put away since my debt was so high.

      The past few years have, at times, sucked - but I see a lot of fun in my future since I kept my goals in site and stuck to my course.

      Things that got me through:
      Good Friends
      Cheap Video Games

      But, to each their own. You don't have to cut out all the fun but if you analyze your monthly expenses it's easy to find a lot of money that you don't need to spend.
      I cut out Cable, eating out, etc...

  5. Yeah, an unsecured debt-consolidation loan thru the credit union at a much better rate really helped me.

    I gotta say though, when I saw you were doing a post on snowballing this was not what I expected.


    1. Chuck.

      I forgot my addendum.

      First time I was snowballed I was in High-School.

    2. No way! You had Mr. Jenkins for Shop Class too?!?! Small world, man.


    3. Yeah -
      I always hated his lecture about being careful.

      "Guy, I've said this before - Over the course of my years I've failed to pay attention to proper safety procedures twice and each time I lost an appendage"

      Then he'd hold up his hand that only had 4 fingers to show proof of at least one missing appendage.

  6. I totally agree with cutting the "fun stuff". As you know, I haven't had cable/TV for 12 years, I don't drink or have any other vices....thankfully.

    Moving here was a double edged sword though. Rent is higher, but I have no desire to go out to eat because the restaurants are all too expensive for the quality and portion size. There are, I believe, two chain restaurants in town - McDonald's and Quiznos. All the other ones are privately owned. So, I make dinner. Saves a lot of money.

    Having my loans in forbearance is going to kick my ass. Interest is building on them. But as soon as I can start paying them, I'm going to head to the bank and see what I can do about it. Hopefully get a loan from them at a lower interest rate to pay off the school stuff, then just pay off the bank loan. Hopefully.

    1. How high of an interest rate do you have on your school loans that this is going to be a problem?

      I know mine was super low at like.... 2.75% at the highest!
      A lot of the time I was under 2%

    2. Some are 6.7%. I have some through AES - those are the expensive ones.

      I have two from PSU that I'm paying off. They are due every 3 months. They aren't too bad.

      But the AES ones will kick my butt. That's why I'm thinking about doing a bank loan once I can start paying them off.

  7. Just got my PSU loan payment thing today. They have 5% interest on them. $215 every three months.

    1. I did mine with graduated payments, starting out small and then getting larger over time.
      However, I was lucky to have a really low Interest rate to make life easier.

      $215 every 3 months isn't too bad - how did you get a payment plan of once ever 3 months? that's kinda Kooky

  8. No, it isn't too bad which is why I am paying them off. The payment plan was their idea. They changed it and sent a letter letting me know. Maybe it made it easier for people to make payments.