With the budget in hand, we decided to turn our “diminishing funds” into a genuine emergency fund. Then we ignored the voices of the enemy in our heads: “what about…what about…what about…” and we were off to Dave’s Baby Step Two:
Pay off all debts smallest to largest with the Debt Snowball
The fall-winter of 2014 brought us some challenges and opportunities. Both cars were mildly hail damaged along with the roof, we were still paying off the school loan: the last debt of our snowball. We had set up a budget and a plan to take the “diminishing funds” along with the insurance funds and set aside $1,000 as an emergency fund. . . like a real emergency fund, and pay everything else towards the school loan. It was scary, but the anticipation of cutting down that debt was quite tasty.
Then I lost my job. We put it all on hold. All but the budget. We reworked the budget to account for the abrupt change and figured we had enough money to cover 4 to 8 months of expenses. God is good. If I had lost my job a few days later, we’d only have had our $1,000 emergency fund to live on while searching for a new job. God is better, within three weeks He provided a new job. We went on our little Thanksgiving ski vacation as budgeted and gave thanks.
To pay off all our debts, first we need to list them out. You should have a good start on that if you look at the budget you prepared. Take all the debts: Credit cards, Loans, etc. (except for House payments) and put them in a separate list
with their minimum payments, and remaining balances like this:
| Debt | Minimum Payment | Remaining Balance |
|---|---|---|
| Credit card 1 | $20.00 | $500.00 |
| Credit card 2 | $30.00 | $800.00 |
| Car loan | $450.00 | $5,000.00 |
| School loan | $350.00 | $28,000.00 |
Order them by the balance remaining. At this point you should’ve budgeted the minimum payments for each of these expenses. But that is not enough. You need to get out of debt!
The rich rules over the poor, And the borrower becomes the lender’s slave.
—Proverbs 22:7 NASB
Trim down you budget in any area you can, (Dave suggests you stop eating out, live off of rice and beans, and start a night job delivering pizza) and apply as much as you can to Credit card 1 in the example. For example, if you could find an extra $230.00 in your budget, apply all of that to Credit Card 1, and only pay the minimums on the other debts. $230 + $20 is $250 so in two months Credit card 1 is paid. Small victory! Great feeling about your progress!
Now for the Debt Snowball. It’s like a snowball rolling down the hill. You’ve been paying $30 on Credit card 2. Since Credit card 1 is paid off, apply that entire $250 plus the $30 you have been paying to Credit card 2. You will gain momentum and intensity to be in a place to pay off all of these debts. When Credit card 2 is paid, pay the next thing on the list with the $280 plus that item’s minimum payment.
Here’s where Dave and I run into a problem. The next item is a car loan. YOU SHOULD NOT HAVE A CAR LOAN! IF YOU CANNOT PAY IT OFF ENTIRELY IN SIX MONTHS OR LESS, OR IF IT’S VALUE IS MORE THAN HALF YOUR ANNUAL INCOME, YOU NEED TO GET RID OF IT. If you’re in this situation, let’s talk further.
Back to the snowball. It may take a while. It is hard work. But you can do it! You can be debt free. The method works. Using the Debt Snowball, we became debt free, except for our home in 2015, and are currently working on Baby Step Three:
Fully funded emergency fund of three to six months of expenses
Next week we’ll answer any questions you send me and discuss Baby Step Three.
