Friday, August 3, 2007

Debt Snowball Calculator

Oddly enough, Crystal's Frugal Friday post is about Dave Ramsey, the financial/debt reduction guy. I had planned this post before I read hers, though! My FF tip isn't about "frugality" per se, but it relates, and I'll get to that in a minute.

(Pssstttt.... I'm having a giveaway right HERE. And you have until 4:00 Saturday to sign up!)

We have debt. BIG debt. I've been discouraged for years about it because I was making zero headway, and in fact, until Westley got his new job, was getting deeper even without *spending* a dime more, all because of high finance charges and other fees. When Westley began his new job, I was finally able to start really paying down those debts, and being able to see real results.

I've never done Ramsey's Financial Peace University, nor have I read any of his books, but I did browse his website several times, and listened to some of his podcasts via iTunes. (Free, and easy to set up, just check the site.) One thing that Ramsey recommends is what he calls the "snowball method" of debt reduction. He teaches that people should use the smallest balance method, and this is how it works with Ramsey:

Write down all of your debt amounts, then line them up in order of smallest to largest balance, NO MATTER THE INTEREST RATE. Now, start paying everything you can spare to throw at that SMALLEST debt first, and only pay the minimums on the other debts. When that smallest debt is paid off, don't say "woo-hoo, now that payment is freed up for fun stuff!", take that amount and add it on to the minimum amount of your next smallest debt. If you've got another one after that, then take THAT amount and add it on to the minimum payment for THAT account. And so on. The idea is that by actually knocking out a whole card worth of debt, even if it's just a few hundred dollars, gives you a psychological boost you just won't get by chipping away at all of them equally and seemingly never reaching zero on any of them.

The one thing I didn't find on Ramsey's site was something to help me calculate how long it was going to take me to pay off our debts by doing this, but I found one. Just go here:

What's The Cost: Debt Snowball Calculator

and plug in your numbers. (You can also figure in Euros and British pounds, just look on the right for the flags!) You can tell it to figure by the balance method, or by order of interest rate. Tell it how much total money you're wanting to pay on your debt each month, and it will calculate for you how many months it will take to pay off, if you continue to use that amount of money each and every month.

I was so surprised and ENCOURAGED when I saw that I can pay off our debt in only 21 months at our current rate! I thought it was going to be something like 5 years, but no, if I continue to pay the same amount I'm doing now every month, I'll be debt free from my creditors in less than two years.

You can also go back and tell it to recalculate using the same numbers, but using the opposite method, to find out which method will save you the most interest. If I were to keep the same amount of payments, but switch over to trying to knock out the cards in order of their interest rate (highest rate first, of course) I would pay about $120 less in interest. For that amount, I'll stick with the smallest balance method - I've already killed one card, and will kill the next one next Wednesday. You can't beat that kind of rush and encouragement!

How does this relate to frugality? Well, anything that encourages you to be financially fit is good, but the encouragement and the feeling of "I CAN DO THIS!" is a good tool in your frugalness arsenal. If I start wanting all those "extra" things I can now supposedly afford with DH's new job, but I know that they will come at the expense of my debt reduction plan, I'm more likely to turn them down. Thus, I will continue to be frugal and careful, because I don't want to lose sight of my plan. If something comes up and I have to go back to paying just my minimums again, or anything less than the current amount I'm throwing at the debt, I can just go back to the calculator and refigure rather than getting discouraged and giving up - I'll be able to see that okay, maybe it's not 14 months anymore, it's going to be 16 months now, but that's liveable, and that's OKAY.

Don't forget to check Crystal's Blog for more frugal delights - it's always great! And don't forget to sign up for your chance to win a free movie ticket tomorrow!


Mandy said...

I love the calculator- I have never seen one like that before! Thanks!

momhuebert said...

When our daughter was born (aah! was it 23 years ago already?) she had some medical bills due to being born six weeks early. Once the bills stopped rolling in, we divvied up the amount of money we had available for medical expenses and gave everyone their chunk. I think each one got something like $10 at first. That was all we had.

When the smallest bill was paid, we added that amount to the next one, and then the next one, and so on, until finally we had the whole amount GONE. I loved getting the last invoice from each one that said "PAID."

I didn't know we were following a fancy debt reduction plan... We must have been smarter than we thought! *smile* It's wonderful somebody thought to actually write it down and give it a name to help people. Good luck!