Then I heard of snowballing your debt. It is a debt repayment strategy that Dave Ramsey has advocated. Conventional wisdom would say to pay off your highest interest rates first so you can save the money you would be paying in interest. According to this plan, however, there is a psychological aspect to debt that needs to be recognized. The snowball method proposes that if you pay off your smallest debt first, you will see results more quickly and be motivated to pay off more.
The key to snowballing is that when you pay off one debt, you take the money you were paying and add that amount to your next debt. The idea is that you gain more and more momentum as you make payments and your debt gets paid off faster. I'll admit to falling into the trap of "Phew! We paid that off, now we have more money to spend!" But that's not the way to think about it!
There is a fun calculator at What's The Cost that allows you to plug in your debts and see a plan for paying them off. Seeing it all spelled out is highly motivating for me. I can even save the snowballs I've created and watch as the "time til debt free" gets closer and closer!
First you need to collect the following information for each of your debts:
- Name of debt (You can name it whatever you want)
- Balance due
- Annual percentage rate that you are currently paying
- Minimum monthly payment (whether it is a fixed amount or a percentage of the balance)
Once you've entered all your info and picked a strategy, the calculator will give you a chart showing how much to pay each month on which debts. You can decide from here if you want to try paying more each month than you are currently.
I ran my first set of numbers about two years ago. It was slightly depressing at that point, but seeing it spelled out gave me the motivation to get it taken care of. I set up our payments on auto pay and put in a slightly painful amount to be paid every month. New things have come up, some months have been really lean; but now when I run the numbers I see a light! If we stick with what we are doing now, we could be debt free in 2-3 years (I didn't add the mortgage in to this.)
Do you have a debt repayment plan? Should you?