My Debt Reduction Post
With the economic news these days, it's obvious that we Americans aren't handling our finances right. Way too many of us are carrying way too much debt. We keep it around like it's a pet and we feed it minimum payments every month. The problem, though, is that it keeps getting bigger and hungrier every year.
My wife and I are sick and tired of being broke. We make enough money to live a good life… that is, if we weren't sending way too much of it out each month to pay for the American dream. Dave Ramsey is fond of quoting from Proverbs (22:7): The rich rule over the poor, and the borrower is slave of the lender. As I look back over the past 10 years, it sickens me to think about the amount of money I've thrown away and how deeply I've sold my family's financial soul into debt.
Well, thanks to Dave's Financial Peace University and his book, The Total Money Makeover, we are taking back control.
Rant Mode: Off.
Anywho…
At the core of Dave's plan are seven baby steps, which he freely admits he has pulled together from other sources. Baby step 2 is the debt snowball. Geeks like me don't particularly like the debt snowball because of the math. You payoff the smaller debts first but they might not be the lower interest rate debts. So in the long run you might well end up paying more total. Dave prefers the snowball method due to the psychological impact of blowing away the smaller debts real fast. It really does help to build momentum and make the whole process easier over the long haul. The folks over at No Credit Needed put together a wonderful post illustrating how the debt snowball works.
The other common method of debt reduction is the debt avalanche. With this method, you payoff your higher interest rate debts first. This should, overall, be the fastest and lowest cost method of paying off debt… if you can stick with it. For example, what happens if you're highest interest rate debt is a $50,000 personal loan? What happens if it takes you 2 years or more to pay that off? Do you have the discipline and the motivation to sacrifice for years while you payoff that debt and then continue to the rest of the debts? Most of us don't and that's why we're in this mess in the first place. The psychological impact of quick victories is immense.
Whichever method you prefer, the key is to stick with it until you are debt free and in control.