Dave Ramsey's Debt Snowball Explained

There are many ways to pay down your credit card debt. Over the course of the next few weeks, I am going to share the different methods espoused by the various financial experts out there. Today, I’ll explore the system that helped reduce my account balance to zero: Dave Ramsey’s Debt Snowball.

Write Down All of Your Debt List out your amount of outstanding debt. List it all out. Write it all down. Your student loans, your car loan, credit card debt, the money you owe your parents or your family, your mortgage. Everything should be listed. Don’t leave a single debt off your list.

Start Paying Down Debt As you begin paying down your debt, it is important that you are current in all of your payments and that you continue to make all the necessary minimum payments. Now, list out your debts from lowest outstanding amount to highest outstanding amount owed. It’s almost counter-intuitive, but you are going to start with the lowest amount owed first. Disregard interest rates. Disregard rationale for a moment. Throw all your extra money that you have at the lowest bill. Keep knocking it down, little-by-little. In no time, that debt will be eliminated. Next, take all the money that you had used to pay off the lowest amount and apply it to whatever bill is the next lowest amount. As you knock off your debt, you keep applying higher and higher sums of money to your debt. Effectively causing what Dave Ramsey has called a “debt snowball.”

For those of you who have outstanding debt owed to various sources, this approach may be helpful in that it provides the emotional satisfaction of eliminating individual debts more quickly. But, if you can’t justify paying off a $200 debt to your mom with no interest before you attack your $9,000 credit card debt at 15% APR, then this approach may not be the best approach for you. I’ll get to other theories on the best way to eliminate/reduce debt in the upcoming weeks.

The Debt Snowball belongs to Dave Ramsey, a syndicated radio host and the author of many books, including the Total Money Makeover. If you are interested in a learning more about Dave’s appraoch to getting out of debt and getting your financial life in order, I recommend you read his book.

Tips For Avoiding The Credit Card Trap

There comes a time when you have to say, “Enough is enough.” I sometimes feel like a lone wolf in the wilderness howling against the continuation of the credit card trap. These cards dangle carrot after carrot in front of your face hoping to get you to lunge forward and take a bite of it. And once you’ve devoured that orange veggie, they just dangle another larger, juicier, crisper, carrot that is even more vibrantly orange than the previous one.

Don’t Fall For the Trap

Ignore the incentives! We know that cards offer rewards points that you can apply towards big-ticket purchases or hotel stays or airplane flights. We know that the actual worth of these incentives is highly debated. In my opinion, it all boils down to this simple fact: behavior. If you are able to pay off your credit card in full at the end of each month, then you should think about signing up for a rewards program. You have a level of financial responsibility that some Americans don’t have.

Behavior Rules!

Be honest with yourself. Is it possible that you credit cards will get out of hand? If so, don’t jump at the most potentially dangerous of all credit card incentives: the Zero Percent Balance Transfer. If you have a proven track record of being current with your credit cards, then this 0% balance transfer might help you out financially. (But please don’t start using that card though!) However, if you don’t have the discipline to stay current on your payments, you might find yourself right back where you started in no time flat. Read the fine print, because usually these 0% balance transfers only retain the rate for a certain period of time and you only maintain that APR if you stay current. (If you miss even one payment the APR can explode to 30%.)

These companies are ruthless with trying to garner new customers. They’re just as bad as Big Tobacco, in my opinion. Seriously. We have to wake up and stop our dependency on bad debt.

Should I Rent Or Buy A House?

If you are debating between renting or buying your next home, you aren’t alone. Many people looking to put down roots are weighing the benefits of the two options, comparing everything from commitment to cost. If you are among them, there are some basic questions to ask yourself as you make your decision.

Ten fundamental questions to answer when deciding whether to rent or buy a home

1. Do you have stability at your current job?

2. Are you committed to staying in one location for at least a few years?

3. Will it cost you more to rent or buy in the housing market you are considering?

4. Do you have money for a down payment?

5. Do you want the liberty to decorate and/or remodel your space?

6. Are you willing to dedicate time and money to maintenance and upkeep if they add value to your property?

7. Would you benefit from having a home as an investment?

8. Are you looking for privacy for you and your family?

9. Are current mortgage rates low?

10. Is it currently a buyer’s market?

If you answered yes, buying a house may be right for you

The reality is that there are variables that will come into play whether you decide to rent a home or buy a home, but you can prepare for them with a little planning. If you answered yes to a majority of the questions above, it may be time to commit to buying a home. While renting is less of a long term commitment and has a lower perceived risk, buyers may be able to benefit from investing in a home because it’s typically an asset that appreciates. Plus, buying a house offers increased privacy and the freedom to decorate and renovate. Still not convinced? Research shows that in many areas of the country buying is actually less expensive than renting and when you buy a home you may be able to reap potential home tax benefits to offset some of your costs.

Choose the right mortgage lender to help you buy a home

If you have decided to buy a home, you may want to start exploring your mortgage options. Choosing a mortgage lender with a reputation for providing outstanding service can make it easier to transition from renting a home into home ownership. Don’t be afraid to ask questions and get to know all your options before making your final decision. The right lender will work with you to answer all your questions and get you pre-approved with the right financing.

How Do Credit Card Reward Programs Work?

When they issue credit cards, the credit card companies are depending on you carrying a balance. Their profit comes from the fees paid by stores and services that allow you to use your card, annual charges, interest, and penalties. Because there is so much competition between the various companies, several of them offer special deals: low finance charges and even a percentage of money back on your purchases.

If you pay your balance completely every month, then low finance charges are not particularly alluring because you have no need for them. Cash back is a different story.

Until more people get this figured out and credit card company profits go down significantly, cash back on your credit card purchases is a great reward for responsible customers. In fact, there are a couple of advantages to exploring which card companies will give you the best deal. First of all, you will benefit from larger amounts of cash back. Some cards will give you more back based on particular purchases, such as a greater percentage on gasoline purchases or a greater percentage on the stores or services you use most often. If you know what your spending patterns are, you can choose a card that offers you the best rate.

Cash back can come in the form of an actual check in the mail or a credit on your credit card statement. Some cards offer you gift cards at certain merchants. These may also be a good choice if they are to places that you actually use.

Secondly, opening a credit card account and paying it off on time, every month, is a great way to improve your credit score. For one thing, you end up having a lot more credit (your balance limit) than you actually use and that is a good thing in terms of your credit record. The only caution is that this is only an advantage as long as you are faithful in paying your balance in full every month. If you believe you might get tempted to let a balance ride, then don’t try this at home!

Essentially, the credit card companies are allowing responsible customers to benefit from irresponsible users of credit cards. Cash back offers are meant to snare unwary customers into a psychological trap: “I can afford this purchase…I’m getting money back.” They obviously were not created for people who pay off their balances; yet people who have the self-discipline to pay off balances can enjoy a small profit in addition to the convenience of the credit card service.