Archives For Debt

big car vs. small car

Pay off your smaller debt first. Credit Jesper2cv

Have you struggled with the question of paying down your smallest debt first, commonly called the debt snowball method, or paying down the highest interest rate first?

I’ve had this discussion with many as I’ve coached families on their finances. Both methods work in theory, but which method will most cause the most people to be successful over the long term.

I’ve advocated paying smaller debts first. It seems both Dave Ramsey and myself were right.

Pay Smaller Debts First: Dave Ramsey Was Right

The basics of  the debt snowball involve paying your smallest debt first regardless of the interest rate.

It seems and is now proved by researchers David Gal and Blakeley McShane that the the debt snowball method wins over paying off your highest APR% first.

The researchers based their data off 6,000 people who paid off their debt and how they did it through a large debt settlement company.

So Dave Ramsey, Crown Financial, and many other groups and financial coaches were right. Behavior trumps math.

Behavior Trumps Math

Why doesn’t pure math work in personal finances? Simple. We are human and not robots. Humans aren’t 100% rational–we have emotions.

By using the debt snowball method, we’re able to see quick victories, get a boost and go on to fight the next battle.

“We conclude that there is evidence that the mere existence of achievable subgoals motivates early goal persistence,”- David Gal quoted in Moneyland

We need to win and win quickly when approaching debt. If you try to eat that big elephant or even a small horse it’s going to take a while and most will just give up.

Small Victories = Success

As you approach your debt payoff, weight loss, or other goals. Both the research and antidotal evidence points toward setting smaller goals and achieving small victories as quickly as you can.

Action: Break down a goal into smaller subgoals. If it is debt–use the Debt Snowball Method.  I’ll see you at the finish line!

The following is a guest post by Tony Colon about their debt free journey and how they are helping military families become debt free.

Tony Colon, a Master Sergeant in the US Army, with his wife Carole has been married for over 11 years. They are a blended family with fourteen children. Out of their fourteen children, four children still reside with them at Fort Bragg, North Carolina. Upon committing to one another in marriage, Tony and Carole also committed to living a debt free life together. Amazingly Carole, with nine children, was completely debt free. Tony on the other hand was weighed down with over $25,000 of debt.

Debt Free Journey

Their debt free journey begins in June 2000, where the family had a debt balance well over $25,000. In the midst of a move from Fort Bragg, North Carolina to Fort Leonard Wood, Missouri; Tony and Carole stayed true to becoming debt free, creating and executing a debt free plan.

Tony had developed a plan to be debt free in six years, Carole had a different idea, and she established a debt free plan that would be accomplished within 24 months. The family worked extremely hard keeping track of expenses and making many sacrifices when necessary.

Carole home-schooled four of their children during the day while working at Wal-Mart from 11pm until 7am. The extra income allowed Carole to contribute to the families’ financial goals. The family was able to meet their goals of becoming debt free, in 22 months, two months earlier than expected.

Since that time, the family has been determined to remain debt free and have followed Dave Ramsey’s, Total Money Makeover Plan to maintain this goal, saving and paying for everything with cash, to include saving for a 100% down payment for a home. They are currently at 73% of reaching this lofty goal. (Current target amount is $170,000.)

Since 2008, Tony and Carole have facilitated the Dave Ramsey Financial Peace University program for the soldiers and families of the 5th Special Forces Group(A), and the surrounding community. The results have been outstanding. Today over 250 Soldiers and their families have graduated reporting a $1.9 million dollar change in position. This represents money saved and debts paid during the 13 week personal finance program.

Tony and Carole’s heart is to see others become free from the bondage that debt represents and to encourage contentment along with wealth building, motivating, encouraging and empowering families along the way. They are dedicated to spreading a message of hope to all and are reaching that goal one family at a time.

Find out more about the Financial Peace Military Edition can promote financial readiness for times of activation, deployment, TDY or PCS.

Pushing Debt Snowball

Photo credit Caleb’s Photography.

So you want to pay off debt? Want to really find freedom from your debtors and be able to use your money how you choose?

It’s not an easy road ahead, but you can do it! Most pay off their debt in 18-24 months, not counting their mortgage.

I can tell you from experience that being debt free is awesome! Before you begin down this debt free road, save your $1000 starter emergency fund, so you won’t have to use debt when trouble comes.

You’re on a budget right? If not, start budgeting like a pro as you learn how to beat debt using the debt snowball. Don’t forget to eat and pay the rent before you attack debt.

What is a Debt Snowball?

The debt snowball is a simply a system to organize and systematically pay off your debt. It’s a plan.

Have you ever rolled a snowball down a hill? What happens? It gets larger and rolls faster. That is exactly what will happen when you use the debt snowball method. No, your debt won’t grow, but the payoff momentum will speed up exponentially.

How to Use the Debt Snowball?

Organize your debt from smallest to largest.–Don’t worry about interest rates. (see FAQ)

Go ahead list them out. It might actually help you feel more comfortable about the debt dragon you’re facing when you put it on paper. Example:

Make Minimum Payments on all debts. If you have any money left over from budgeting beyond minimum payments, apply this towards your smallest debt.

In our example you’ll be making $825 total in mininum payments. If you make that $826th dollar it is applied towards your credit card #1 as extra.

Payoff your Smallest Debt- This might take some time. You might need to increase your income or sell some stuff to get this snowball moving.

Roll Your Snowball – After you’ve paid off your smallest debt apply the minimum payment you just paid off toward your next smallest debt.

In our example after you pay off credit card #1, apply that $45 towards credit card #2 + the $55 you were already paying for a total of $100.

Now you’re rolling! With those extra payments your time in debt will dramatically decrease and the amount of interest you’ll pay will shrink too.

Keep Rolling- Keep rolling up your debt payments until you’re done. It will happen faster than you think! The hardest part is getting the ball to roll.

Inspire Others- When you’re debt free tell everyone and send me your debt free stories, so I can add you to this list of debt free stories.

Large Snowball

Getting out of debt is better with friends! Photo credit  kamshots.

Debt Snowball FAQ

What about the interest rate? [common sense answer] The reason to pay down your smallest debt first without regard to interest rate is to get a quick feeling of success. Eat the hushpuppy now and save the elephant for last. If you don’t succeed quickly, you’ll give up.

No, seriously what about the paying off the highest interest rate first[2nd answer] Most families pay off their debt in 18-24 months, so the math shouldn’t really make much difference. Behavior change trumps math when it comes to beating debt–Don’t believe me? Read the research.

I still think I should pay off my highest interest rate first. What do you say to that? [last time I promise] Hey, so if you’re really into paying off the highest interest rate first, go for it. Find a system that works for you and stick to it.

What about transferring my debt to 0% balance cards? Realize this is a band-aid to your bigger debt problem, but it can provide some relief. Just make sure the fee (if any) you’re charged for transferring is worth leaving your old card.

I don’t have extra money for my debt snowball, what do I do? You’ve got an income problem. You need to make more money.

What about Payday LoansIf you’ve got payday loans, sound the alarms and work 24-7 until you pay those jokers and never take a payday loan again. Yes, put payday loans at the top of your list no matter the amount.

What about my MortgageSave your 1st mortgage till you pay off the rest of your debt down, save your 3-6 months emergency fund, start retirement and kids college savings.

I’ve got a 2nd Mortgage. Should I add this to the snowball? If your second mortgage is less than 1/2 your income, then include it in your snowball.

Should I add to retirement while in debt? If it looks like you’ll be out of debt in less than 5 years, and you still have years to work-then yes. Stop adding to retirement and focus your income and energy towards debt. If it looks like decades before you’ll be out of debt, then you probably have an income problem or a special situation that requires a longer answer.

Where does IRS debt go in the debt snowball? If you’ve got IRS debt, put it on priority and don’t default, the IRS doesn’t play around.

Will I ever be debt freeYes, keep working your extra job and paying off debt. Need inspiration? You too can pay off $100,000 of debt!

Why not just declare bankruptcyBankruptcy is not the cure, its usually a symptom and you’ll find yourself back in debt if you don’t fix your basic budgeting and overspending issues.

Have you used the debt snowball method to get out of debt? 

I love to hear success stories of people defeating debt. Slaying the debt dragon is tough and they deserve their day in the limelight.

Being debt free is awesome, if you’re not there yet, I hope these stories will inspire you. You too can become debt free!

*If you have a recent debt free story, feel free to link to it in the comments and I’ll try to add it to the list.

Debt Free Stories (Individual Stories)

Becoming a Debt Free Family (Paying Off $90,000 in Los Angeles)– Guest Post on OTC.

How I paid off $14,000 and Became Debt Free by Carrie at Careful Cents.

I’m Debt Free (except for the mortgage) by Ashley at Money Talks Coaching

I’m Newly Debt Free! (And Ways You Can Be, Too) by Jeffrey Tull at Money Spruce

I’m Debt free! by Canadian @ Cents of a Country Girl

How We Live Debt Free and Avoid the Man from Empress of Dirt

Financial Freedom, The Journey– How a blended military family of 14 children paid off their debt.

Collections of Debt Free Stories

We Did It! Success Stories on

Don’t miss Debt Free News at Enemy of Debt. So far there are 24 stories of how people just like you became debt free.

Matt at Slow Roasted Money has a growing collection of people who’ve paid off their debt.

Debt Free Living: 5 Inspiring Blogger Stories

Debt Free Videos & Podcasts

Debt Free Living Podcast by Jon White has dozens of debt success stories recorded on his podcast. Maybe you’ll be his next guest!

I’m Debt Free and I know it music video by Stacy at Stacy Makes Cents

If you have a recent debt free story, feel free to link to it in the comments and I’ll attempt to add it to the list.

Are you Debt Free? Bookmark this page and come back to listen to or read these stories when you’re feeling discouraged.

Student Loans for Life

Don’t keep student loans this long!

Most college graduates have college debt, unless you did something crazy like going to medical school for free.

I’ve talked to several very smart individuals lately who aren’t convinced they should pay off their student loans early; rather they’d like to pay the minimums the life of the loans.

I’ve encouraged them to knock out the student loan debt since they have the income to do so, but after they pay off their other credit cards and consumer debt.


I’ll share a few reasons why I believe paying off student loans early is a wise financial decision.

Why Pay Off Student Loans Early?

Student loans are a huge boulder that many college graduates carry with them for decades. Let’s put that boulder down and free your hands and money to work towards your goals.

1. You don’t know the future– The future is unknown and you don’t know what it will bring. That large student loan debt (a.k.a. student mortgage) limits you. Examples:

  • I’ve met female lawyers and docs who want to pause or quit their practice to start a family, but they can’t due to their $100,000+ student loan debt.
  • You are counting on the fact that you’ll be able to work, but the possibility for disability is a reality (another reason for disability insurance).
  • If you’re single and thinking of getting married, why bring debt into the relationship? Debt just isn’t sexy and might actually turn off a potential financially responsible spouse.
  • So many other possible future unknowns: death, sickness, divorce, change of professions…etc.

2. You’ll have more choices- Being debt free gives you choices. Want to transition to a lower paying job that you actually like? Do it! You want to live off one income? Go ahead!

Our family was able to do just this. My wife was able to quit her day job and stay home with our son since we paid off the remainder of my student loan. If we still had debt, this choice might not have been possible.

3. Opportunity cost– By paying principal and interest, the opportunity cost to grow your net income is gone.

Just think what you could do with your student loan payment? What if you paid off your your student loan early and had an extra $250 to apply towards savings or debt?

That is $3,000 a year that could be working for you earning interest! Action – Figure how much you are missing out per year due to your student loan debt.

4. Freedom– Being debt free except for your mortgage gives you a feeling of freedom and relieves stress. Being able to rest at night, knowing that you don’t owe anyone is a great feeling–I dare say being debt free is addictive.

Bad Reasons to Keep Student Loan Debt

These are a couple reasons I’ve heard from people who want to keep their student loans:

I want to keep my loans for a tax deduction.” Keeping your student loans shouldn’t be for tax reasons, in fact any financial decions shouldn’t be driven by tax reason.

The cap on deductions for student loan interest is $2,500 per year and you’ll need to make less than the required amount that changes yearly. 2011 it was $75,000 single or $150,000 jointly. Check the IRS requirements

True, you do receive a tax deduction for the interest paid, but this is a small amount. It’s like the government giving you a cheap plastic trophy when you were actually on the loosing youth soccer team.

“My interest rate is lower than inflation, so I’m making money.”– This is usually a statement from an educated guy who wants to beat the market. Inflation is a given and uncontrollable, but your debt doesn’t have to be.

The problem with this statement is it doesn’t account for opportunity cost or factor in the risk of debt.

Start Paying off Your Loans

If you’re out of consumer debt, there is really no reason to start getting aggressive to pay off your student loan early.

Paying any extra towards your student loan debt will start reducing principal or more interest from accruing.

Example: a $35,000 student loan at 3.25% for 30 years results is estimated to have minimum payments of $152.32 and cost you $19,836 in interest.

If you add just $100 extra per month in this example it reduces interest payments of $8,948. That’s a $10,888 difference in interest payments and shortens your time in debt to 15 years!

Use this student loan calculator to figure your monthly payments and how much you can reduce your total payout by adding extra monthly payments or a large one time payment.

What are your thoughts about paying off student loan debt early? 

Photo Credit DonkeyHotey (Creative Commons)