I’m a big fan of Dave Ramsey and his debt snowball plan. I think it is probably the easiest approach for most people to get started with getting out of debt. I’m following the majority of his plan, though not exactly as Dave outlines it- no offense Mr. Ramsey. 🙂
If you haven’t seen it, here is the basic Ramsey plan:
- Stop using your credit cards
- Make a written budget
- Get current with all of your bills if you aren’t already
- Suspend retirement savings
- Save $1,000 for an emergency fund
- List all of your debts from smallest balance to the largest
- Pay minimum payments on all debts, but pay any extra money you can find toward the smallest
- Work your way down the list, rolling the payments from debts you pay off into the next one on the list
- Once you are debt free except for the house, save a 3-6 month emergency fund
- Resume retirement savings
- Pay off your house
I am following the overall structure of the plan, but I have made a few modifications. Rather than paying off my smallest debt first, I decided to attack my highest interest rate credit card, which also happens to be my largest credit card balance. See the details below and I think you’ll know why I did this.
- $10,110.72 @ 11.9%
- $7,120.97 @ 4.63%
- $5,535.76 @ 4.99%
- $1,702.75 @ 3.99%
Not all of those lower rates are fixed for good, but they will last a while and the finance charges on the high rate card are more each month than the other three combined. It just makes too much sense to pay the high rate card first. Overall, the credit cards taken as a whole are the smallest debt when compared to the student loans and the mortgage, I’m just not breaking down each card in order to pay the smallest first.
In my opinion, the most important part of this process is tracking your spending and making a budget. As Ramsey says, write down every dollar on paper, on purpose. You really have to plan every single dollar and make sure you balance everything each month. Doing this step was like getting a raise. I’ve found so many ways to cut my spending and I’m making very nice progress on my debt snowball now. Look for a post soon that will cover my budget in detail.
The rest of my debt snowball seems a long way off, but I will attack the student loans after the credit cards, then the mortgage. I will most likely boost my emergency fund and start some investing after the credit cards are gone. My student loan rates aren’t great, but I don’t want to delay investing and savings any longer than I have to. Of course, I have some time to figure this part out, so my plans are subject to change. I wanted to share this to help you get a feel for where I am coming from and how I am working at getting out of debt. I hope it helps someone too!