Tuesday, December 04, 2007

Our Debt Snowball

At this point, she (my wife... I'll take the tactic of "we're in debt" and identify my wife as she) and I have a significant amount of debt. Like so many Americans, we didn't suddenly go on a spending spree one day and suddenly have "tons of debt." Instead, the debt was built as we had one budget shortfall after another. Month after month, year after year. This year it stops. Here's what we've done to stop it:
  • We have both decided that it needs to stop and that we will do what it takes to get it to stop.
    This is perhaps the most important step.
  • We have a budget that has been matched up with our current spending on bills and roughly on discretionary costs like our food bill, gas bill and spending on clothes and "dining."
  • We have a plan for, at minimum, sticking to the budget.
  • We have a few ideas that we will try in a "frugal month" (probably January). A frugal month, in case you're not up with the personal finance blogosphere lingo, is a month where you try a few cost saving measures for 30 days to see how they fit with your lifestyle and whether they're "worth it" or not.
  • Of secondary importance (only to committing to the plan), we've planned our debt snowball. Our debt snowball is what this post is all about.
What is a debt snowball?
The idea is that you get the "paying off of debt" ... "rolling" and the debt will "melt away." So, what did we do to get our debt snowball rolling? Well... we make our first push in January 2008, but we've done a good deal to build the snowball to start with:
  • Without knowing everything that everybody was saying, I followed the maxim of evaluating the situation before I really got started. This followed most of the "debt snowball" advice out there. I gathered
  1. the interest rate
  2. minimum payment
  3. balance on each outstanding debt we have
  • I sorted each of these debts with the highest interest rate on the top of the stack (I used OpenOffice Calc spreadsheets, but you get the idea).
  • I then took a step that most of the of the personal finance sites leave out... I evaluated all of the balance transfer offers that I'd collected in the previous two weeks and shuttled money around. While I ended up paying nearly $1,300 in balance transfer fees ... it will end up saving me nearly $3,800 in interest in just one year (probably close to $9,000 over the course of our three year debt snowball). The big caution on this one is to make sure that particular element of balance transfer shopping isn't left out. Don't pay more in balance transfer fees than you would have in interest! Also, be ready for the actual balance transfer fees. One card that I transfered to required that the balance transfer fee be paid as part of the next minimum payment. A big ouch if I hadn't realized it at $600+.
  • I re-sorted the debts with the highest interest rate to the top of the list.
  • I then totaled up my "debt bill." My "debt bill" is my bill that is equal to all of my minimum payments
    plus an amount I'm specifying as "what I can afford to pay" on my
    highest interest rate debt balance. Until I've paid off all of my
    debt... my debt bill will stay the same. The only thing that I am
    allowed to change is how the debt bill amount is allocated among the
    debts to be paid. The only time that will change is when I hit a $0
    balance on the high interest rate debt I'm targeting. As I pay one off,
    the "what I can afford to pay" will be shifted to the next highest
    interest rate debt balance to be added to that minimum payment.
    • To make
      the "what I can afford to pay" harder to "skip" I use weekly payments automatically from my bank's bill pay.
    • For the debt payments where I'm paying the minimum I'm using the simplest method which is to automatically send payment through my bank's bill pay.
  • For each of the bills, I chose one of two payment techniques:
    • Weekly Payments
      I multiplied each of the minimum payments by 12, divided them by 52. This gave me a weekly payment that I was to send to the debt owner. By paying a little bit each week, you can reduce your average daily balance and, in-turn, reduce the amount paid in interest. This also keeps the payments consistent and easy to budget.
    • Monthly Minimum per Billpay
      I have free bill pay through my bank. It runs through "thevalidnetwork/mycheckfree" and requires that I have created a login on the individual credit card's website and that I setup to receive "eBills" (some of the companies don't require this, but most of them that I'm dealing with do). Each month, the credit card company sends the current balance and minimum payment due information to my bank. The bank automatically schedules the minimum payment due on the due date.
  • Next, I projected when the debt would be paid off on the first card and set a reminder 1-month before it would be achieved to re-evaluate and make sure that everything was going as expected.
  • Finally, sit back and watch the debt melt away. Any extra money that I can scrimp or save gets thrown into an ING Account where she and I can evaluate where to best "spend" the money.
Overall, its an interesting plan that requires financial discipline. If we start spending out of control, we'll end up with too little money in the checking account to keep going. Bad, bad, bad. More on how we're preventing that later!


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