Baby Step 2 - The Debt Snowball

Here comes the biggest "baby step" to becoming debt free. The long step for us. A pretty hard step for us. The Debt Snowball. The Total Money Makeover says that you should list all your debts from smallest to largest and start tackling them in that order. By paying the smallest debts first you get some "quick wins" and get the momentum going, or the snowball rolling.

According to the calculator on Dave Ramsey's website, it will take us around 7 years to get rid of all our current debt (except the mortgage), just by making minimum payments and then snowballing that money onto the next debt once each one is paid off. While that sounds like and awfully LONG time to be on Baby Step 2, it's actually not when you look at the details.

Currently we have student loan debts totaling $56,000 between the two of us. We started paying these in 2006, which means they wouldn't be completely paid off until 2026 and 2031 if we stick to the repayment schedule. Suddenly having everything paid off in 7 years (2021) sounds a lot better!  

Student loans will be the last debts we pay in the debt snowball. We have two four credit cards and two car payments to tackle first. This is one place where the Debt Snowball gets really hard for me. While we do have two credit cards that charge interest, two are interest free for another 12 and 24 months. These two cards have the smallest balances, so they need to come first on the payoff schedule. This goes against everything I believe! Clearly it makes more sense to pay off the highest interest rates first, not these small debts, but I'm sticking with the plan. If I knew how the numbers were supposed to work, I shouldn't have let us get in this debt to being with.  

The same goes for my car. We bought it new with 0% interest financing. It's the third item on our Snowball list. See why this is so hard for me! Although, with the car payment being $321 per month, it will be so good to have that money freed up to increase my next debt payment! The first two cards I mentioned only have $100 minimum payments each, so rolling over those payments isn't quite as exciting as the bigger car payment. I think I can have all three paid off in 7 months, which will free up an additional $521 per month!

Dave says on average people using his plan will complete the debt snowball in 18-24 months. The gazelle intensity sets in, income hopefully goes up, expenses hopefully go down, and you just need to throw any extra money you can come up with towards these debts! This is a pretty motivating statistic. I only wish we would have started 18-24 months ago!

Baby Step #1 - A $1,000 Emergency Fund

To start our Total Money Makeover and our journey to be debt free, we are first supposed to save $1,000 in an Emergency Fund.  This needs to be easily accessible, but not too easy!  We are not supposed to dip into it for anything other than a true emergency.  Dave Ramsey likes to use the transmission going out as an example.  We have replaced transmissions in both of our cars in the last 7 months, so hopefully we won't have to deal with that emergency again any time soon!  Also, both were over $1,000, which leads me to my next point.

I remember either reading or hearing Dave say before that if you have a lot of expenses you could save $2,000.  We have three kids with large daycare expenses.  I feel more comfortable with us having $2,000 in the Emergency Fund, so that's what we are doing.  When it gets down to it, and I'm only $1,000 away from a big pay-off, I'll probably go ahead and splurge then to pay something off quicker, but for now, I like that cushion.

I actually already had a little over $2,000 put away for us in a savings account at our local credit union.  It's not tied to a checking account or anything like that, so not too easy to get.  I have to go down and physically make a withdrawal to use that money.  

I went to the credit union last week and withdrew the small amount of money we had in savings over $2,000 and will use that up to start off Baby Step #2 - The Debt Snowball!

Baby Step #1 - The starter Emergency Fund.  DONE!!!

Welcome!

Thank you so much for stopping by to read my little blog!  My husband and I started the Total Money Makeover courtesy of Dave Ramsey's book by the same name on March 1, 2014.  I have enjoyed reading a lot of blogs posted by others using the same program, so I thought I would start my own as a way to keep track of our successes.  Hopefully it will be an inspiration to some of you!