I’ve been pounding away at my debt over the last two years. In 2013, I decided that I was sick and tired of being in debt. At the time I had $72,000 in student loan debt. Over the last two years I’ve paid off $42,000 ($12,000 from DoD Student Loan Repayment Program and $30,000 of my own money). With only $30,000 left in debt, I can see the light at the end of the tunnel and it feels good. For the next year, I’ll be scrimping and saving everything I can to finally be debt free.
Hypothesis: I know that I’m will eventually be debt free, but I believe the debt snowball will motivate me to pay off my debt faster than a year. By focusing on smaller goals and building on that momentum, I feel that I’ll be more motivated to cut my expenses and increase my income.
Using The Debt Snowball
I’ve been inspired to become debt-free for a while now, but recently I’ve started listening to the Dave Ramsey Show and I really like his take on wealth building. His main message is don’t borrow money and if you’re in debt, get out as soon as you can and don’t look back. Simple enough. But what really caught my attention was his suggestion on using the debt snowball.
The debt snowball is simple. Just list out everything you owe money on, make the minimum payment on all the debts, then apply any extra towards paying off the debts smallest to largest. Once the smallest debt is paid off, you take the that extra cash and apply it towards the next smallest debt.
The method works because you break an otherwise daunting goal into bite-sized victories and you’re able to see progress along the way. For me, the only debt I have left are nine private student loans from the same bank with all the same interest rate.
What I’ve done in the past is take the entire debt divide it by the number of months I want to pay it off by. This method seems logical…I owe this much, I pay this much and I’m done…but there’s no incentive to pay more. There’s nothing motivating to finish early.
By using the debt “snowball” realized that I could pay off 4 of the 9 loans within the next 6 months. I could pay off one loan each month in the next 3 months. By having small targets…i.e. a little loan, I could build up my cost cutting and income muscles over time to take on larger and larger debts and until I’m done.
Laser Targeting Loan Repayments
After looking into it, I found out that after paying the minimum payments on my loans, I could apply any extra payments towards specific loans at my bank. While the total debt is the same, there’s something extremely motivating about seeing each of your loans disappear one by one.
I originally planned to allocate $2,500 per month ($30,000 / 12 months) towards debt repayment, but after discovering that I could pay off an entire loan next month by paying an extra $162 I saw the real power of the debt snowball. By focusing on eliminating one loan at a time, I can build momentum along the way and find new ways to save money and increase my income.