First and foremost the plan is built around 7 "baby" steps, though Dave and my definition of baby certainly differs. I was surprised to find that his suggestions, and my current strategy is fairly similar. His first step, and mine, is to amass $1,000 in savings. Where we differ is that he views a couples funds jointly, I do not. So, in my eyes I don't have $1,000 in savings, according to Daves plan I do, as The Missus has $1,000 or more in savings. I'm not totally in agreement, but I can accept the differing opinion.
His second step is to begin making a "debt snowball" while the name makes me chuckle, as I always envision a snowball growing, maybe a debt melt? But, in his defense he's referring to a debt repayment snowball, which is just clunky to say, but in the end the theory is that you order your debts from smallest to largest, then proceed to pay off the smallest, then the next smallest, etc. all the while making minimum payments on the rest. In theory the excitement of repaying the little guys will continue to motivate you to pay off the larger debt. However, he only looks at interest rates when two debts are similar in size. I disagree with this in principle. While I can understand wanting to pay off, as I call them, "ankle-biter" debts, those debts under $300, I feel that any lump sum of money applied to debt has to go against highest interest debt, or the progress made will be lost under compounding interest. So again, we're similar in our approach, but we differ in practice.
His third "baby" step is to amass 3-6 months of expenses in savings, for me six months is nearly $10,000, which is simply huge. I think this is where his system really degrades. This step can be simply insurmountable, even with the bulk of debt paid off, with the exception of a mortgage, I would be able to only put $1,000 into savings a month, provided nothing un-planned happens. This is nearly a years effort.
After the third step he get's into investing, paying down your mortgage, and giving, but at that point with only a mortgage to worry about it's fairly simple to manage your money.
I'm going to follow his program for awhile and see where it takes me, but I'm also going to keep track of where I would have put money according to my plan to see how, in the long run, if it does in fact make sense to pay off smallest to largest, or in interest rate should be the determining factor.
1 comment:
It's definitely going to take a while to realize the entire "baby step" plan. Less than a year to build up your savings is not bad.
The key to the snowball is making sure that when you pay off the smaller debts, you add what you were paying toward those loans to the minimum payment of the next loan--that's the snowball. Your payments toward your largest loan keep getting bigger and bigger as your smaller loans drop off and you can use the money you were spending on them toward your larger loans.
Best of luck on your financial goals! I know you can do it. Never let up the intensity and you'll be there before you know it. Check out Dave's podcast for his advice to others, and listen Fridays when people call in to announce that they're debt free. Some amazing stories that are all byproducts of hard work and it's great to hear their relief.
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