Key Points:
- Dave Ramsey’s model works for most people
- The snowball starts slow and speeds up
- This method will change your life
Debt Snowball
Debt, just another four-letter word. A significant hurdle that’s holding you back from investing.
More importantly, it holds your future investments back from long-term compounding. Compound growth is an essential component of wealth building.
You’ll need to crush that debt before beginning your investing journey.
It sounds complicated, but there’s a simple plan. The debt snowball is a model that systematically gets you out of debt and on your way to increased wealth through compound growth.
As far as I know, the debt snowball is a Dave Ramsey idea. I sound like a Dave Ramsey fanboy, but his principles work. I don’t believe in everything he teaches, and I don’t think his model fits everyone. However, the basic principles of his teachings are phenomenal and will work magic for most of the population.
Even after you’ve gotten yourself out of debt, his general philosophy still works for many, if not most, people.
You don’t like Dave Ramsey. Okay, personal finance is personal and different models work for everyone. I’m not telling you to like Dave or all of his principles. Some like to be more aggressive, and others more conservative while investing.
Pick the model that works best for you.
Be the Turtle
We’ve all heard and ignored the saying, but it’s the truth. Slow and steady wins the race.
Personal finance and life, in general, are marathons, not sprints. The get-rich-quick models are generally bogus.
All they do is delay the growth that you should be seeing.
Be the turtle. I know it’s boring, but be the turtle. Before you can start investing and growing wealth, you must pay off your debts. Dave Ramsey’s debt snowball is the way to do it.
Start with the Smallest Debt
Remember when you were a kid, and you built snowmen? Or maybe you’ve made one with your kids recently.
You start with a small snowball. Then you roll it in the snow, and as you do, it collects more snow and keeps getting bigger and bigger. The next thing you know, the ball is so big that you can’t even move it.
That’s exactly how the “debt” snowball works. You’ll start with the smallest debts first, growing into attacking the largest ones.
Start by listing your debts from the smallest to the largest. Put them on a poster board, mark them off with a marker, and hang them on the bedroom wall. Make it a game! Hell, color code it.
Whatever you need to do, put it in your face every day and stay encouraged.
Start with your smallest debts. I don’t care what the interest rates are. Start with the smallest debt and put the most considerable payment possible towards that debt every month.
Keep making the minimum payments on your other debts but only the minimum. We’re focusing on paying off the smallest debt first. Keep putting as much money as you can towards the smallest debt. That is your current goal.
The rest of the obligations are just being maintained so that you don’t get substantial finance charges applied to your account.
Move to the Next One
Once you’ve paid off the smallest debt, cross it off and start on the next one. Move all the money you were paying towards the previous debt to the next smallest debt and keep it going.
The amount you’re putting towards this debt should be higher because you’re moving everything you were using towards the previous debt and the minimum payment you were paying on this debt. Snowball!
Keep up the minimum payments on all other debts while you crush this one. Now that that debt is paid off, repeat the process until you have all debts paid off except for your mortgage.
Mindset Shift
The idea of attacking small debts works in several ways. For one, it sets the tone of what you’re trying to accomplish.
The little wins along the way have a side effect on how you live your daily life. The side effect is a mindset shift.
The shift from being a spendthrift to a budget-conscious personal money manager, wealth builder, and overall financial badass.
You’re mentally moving from just getting by and living on credit cards and loans to wiping that debt out and building a better future for your family and yourself. Changing everything you’ve learned about money and re-educating yourself.
Understanding that money is a tool, not a goal.
These little wins of crossing debts off the list motivate you. It’s the little wins that create the forward motion. The momentum that you need to push through and continue forward when it gets complicated.
These little wins keep you on a budget and change how you think about spending money. This seems small, but it’s a stepping stone to changing your life.
Attacking small debts also works with a compounding effect. The snowball is the compounding. The small debts being paid off keep building and compounding into larger payments being made on the next smallest debt.
Next thing you know, you’re making monster monthly payments on your most significant debts and paying them off quickly. Amounts so big you wouldn’t have imagined being able to make when you first started this journey.
That’s how compounding works. The little wins create more significant wins.
This slight mind shift creates monumental changes in how you think about finances. Before you know it, your vision no longer resembles how you viewed your finances at the beginning of the journey.
Forget it. At this point, your view on life has completely changed. You’ve grown. This little exercise has changed you for the better.
No Reason You Can't Start Now
The best part is that this method takes no prior knowledge of paying off debt, investing, money management, or anything else. It’s a simple process that anyone can follow.
It doesn’t matter where you are or how much debt you’re in. Start the process now and crush that debt so you can start investing.
Famous Quotes:
“There is only one way to eat an elephant: a bite at a time.”
Desmond Tutu
“Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t, pays it.”
Albert Einstein
