Friday, September 9, 2011

The Snowball Debt Program

The last couple of days, I have made an attempt at stating what the Bible has to say about money and debt (part 1 & part 2). I ended it with this thought: that debt should never be something that is long-term and that we are content to live with. It should be something that we seek to eliminate and get rid of in our life. Now, there have been a few times when my wife and I have started and effectively used a plan to eliminate debt. Almost every snowball debt program I have seen is very similar.

The first step is to create a list of your debts. Now, this list can be in different orders based upon which program you are using, but for this illustration, let me use Dave Ramsey's order. He says to put them in smallest balance to highest balance. He says to not worry about the interest rate at this point. So, make a list of your debts. Take the following chart to illustrate what it might be for some random couple (taken from pg. 91 of Financial Peace Revisited by Dave Ramsey).

Item
Balance
Payment
Interest Rate
Gas Card
$400
$60
18%
MasterCard
$700
$70
18%
Visa
$1,200
$200
18%
Car
$6,500
$250
12%
Student Loan
$7,000
$123
9%
House
$60,000
$540
9%
 
The next step is to do everything you can to pay off that first debt. Pay the minimum on all your other debts, but also realize that you cannot take any more debt. Don't use the gas card. Don't use the credit card. Don't go buy a new car. Nothing more. This will only work if you budget your money. Do you know where every dollar that you earn is going? Do you control your money or does it control you?

In John Cummuta's Cascading Debt-Elimination System, he says one of the most important factors in paying down your debt is to create your Accelerator Margin. This is money that is left over after you budget your money. Let's just say for the couple above that after budgeting their money, they find out they have $50 left over every month that is not assigned. They take that $50 and add it to their $60 payment on their gas card until it is paid off.

Then when it is paid off, they take the $110 they were paying on their gas card and add that to the $70 they were paying on the MasterCard. Now, they are paying $180 a month on their MasterCard and should have that paid off in a couple months. Then they take the $180 they were paying and add it to the $200 so that they pay $380 a month on their Visa. They keep doing this until everything is paid off. (By the way, if you are paying 9% on your home right now, might I suggest refinancing).

Make sense? Then why don't we do it? Might I suggest that we do not do it because we fail at the very beginning of the process: creating and living by a budget! I don't care how much money you make. I don't care how much money I will ever make. If I want to be a good steward of God's money that He has given to me, I must know where I am spending it. And might I suggest to you that you should know as well. Create a budget, live by it, organize your debts, and pay them down. Why don't you start today?

Question: What Would You Do With Your Money If You Had No Debt?

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