Fiscal Friday: Achievement unlocked!

Warning: Slightly boring update on my debt situation ahead. Feel free to skip this post if you're not interested; it's really for my own documentation as much as (if not more than) it is for anything else. So. Last weekend I made my final payment on my "school loan" that I owed to my dad! I still have a really long way to go — as in, several thousand dollars long — but this was a particularly rewarding milestone because I got to see the look on my dad's face when I handed him that final check. And it was made even sweeter because my final "debt snowball" payment was supposed to be next month, but I made a double payment this month as a surprise birthday gift to him. So in total, I paid that debt off about a year and a half earlier than I was originally supposed to!


Now all I have left to tackle are my car loan and the personal loan I took out to transfer my credit card balances. And with the way the debt snowball works, my payments will get bigger and bigger each time I pay off a debt and start to focus on the next one. So my payments on the next lowest debt (my personal loan) are about to quadruple (or maybe even increase even more than that).

Also, I noticed that I've mentioned the Dave Ramsay debt snowball plan here on the blog before, but I don't think I've really properly explained it. Basically, here's how it works. Say I have four major debts to pay: $500 on Credit Card A, $1,000 on Credit Card B, a $2,000 Personal Loan and a $5,000 Car Loan. For the sake of simplicity, let's say my minimum payment for all four debts is $25 a month and all four have a 0% interest rate.

The debt snowball dictates that you focus on paying down the debts one at a time, in order from lowest to highest. So in this case, Credit Card A (CCA) is my main concern. I make payments as large as possible on it every month, while making minimum payments on all the others. So say I pay $100 a month on CCA, while making the $25 minimum payments on the other three. In five months, my debt is reduced to: CCA - $0, CCB - $875, PL - $1,875 and CL - $4,875. One debt down!

The next month, I take the amount I was putting toward CCA ($100/month) and add it to the minimum payment for the next lowest loan, CCB. So I'm now paying $125 on CCB, and the minimum on the other two. In seven months, CCB will be completely paid off. And at that time, my debt will stand as: PL - $1,700 and CL - $4,700. I then take the amount I was paying on CCB ($125) and add it to the minimum on PL, making my new payments $150. And by the time PL is paid off, CL's balance is down to $4,400, and I'm ready to start making payments of $175 on it until it's paid down.

Now, where the snowball really takes off is when you start adding your "extra" money to the "snowball" payments. Plus, in real life, interest is a factor that extends the length of payments, but minimum payments are usually higher. So instead of having a "snowball" of $175 at the end, I'm looking at payments in the $700+ range. If all goes well, I expect to be debt-free before the end of this year, and maybe even before Halloween! Let me tell you how I feel about that.


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