On to Lesson #2!
Quick Recap: Lesson #1 of Financial Peace University covered Baby Step #1- the Emergency Fund and the idea of a Zero-Based Budget. You can read all about it here!
Lesson #2 is all about tackling the debt snowball while eliminating any future debt, also called a plasectomy.
The idea behind the debt snowball is to pay all minimum payments on your debts, while putting as much money as possible towards the smallest debt to get it paid off as soon as possible. Once that debt is paid off, you move onto the next smallest debt and continue this process until you are debt free!
The first step is getting the snowball rolling, once it gets rolling, it continues to pick up momentum as each debt is paid off and you are able to apply more money to the next debt, and then the next debt until it has wiped out your debt completely.
There is also another mindset of what is called the debt avalanche. This is the opposite of the debt snowball. Instead of paying off your smallest debt first, you start with the largest, and work your way down.
Dave Ramsey is against the avalanche method because the amount of time it will take you to pay off your largest debt with the debt avalanche method is insane. You will not feel like you are making any progress, because you will still be looking at the same number of loans for a while. But with the snowball method, you will be able to pay off the smaller one sooner than the larger one, and then you will already be moved onto the second or even third debt, by the time you would have even completed your largest debt with the avalanche method.
The main benefit to doing the snowball method is the mentality. When you crunch the numbers, doing one way or another is a difference of a couple of hundred dollars in interest. So, the numbers in the grand scheme of things aren’t the main concern. The main concern is seeing progress and keeping a positive mentality instead of getting discouraged because you are not seeing the physical results of getting rid of your first debt. If you work at something for a year, and feel like you are making no progress, you are not as likely to continue pushing towards that goal. But if you see progress being made as you chip off each debt, you are encouraged to continue moving forward.
Mentality is everything. In the words of a young Troy Bolton and his fellow Wildcats, "You gotta get'cha, get'cha, get'cha, get'cha head in the game"
If you have read some of my previous posts, you know that we have been successful with the debt snowball previously. I have always been a huge supporter of this idea, because I have seen it work first hand when we paid off $27k+ in 2 years. And that wasn’t even us going all in like we should have. It was kind of a lukewarm snowball attempt. So, I can only imagine what can happen if you go at it full force and being intentional with your money.
Dave Ramsey and the other personalities on his team, use the term “Gazelle Intense” a lot in their podcasts. In this lesson they explain exactly that means, and to sum it up without giving it all away, it is a “whatever it takes” mentality. You do whatever you can to knock out your debt snowball as quickly as possible. You are intentional in every thing you do. You take on jobs to bring in a secondary income, you cut out unnecessary spending (hello, subscriptions, eating out, etc…), you get creative with how you spend your money, and before you know it your debt snowball is in full swing and your debt is getting knocked out one by one!
This lesson also goes through a lot of myths surrounding the idea of credit cards, loans, and other lines of credit. There were a lot of myths that I knew were myths, but also some that surprised me that I didn’t know. One that really stood out to me is that Debt Consolidation is smart. Even though I have never done it, I always thought it was smart, because it combines your payments, and you get a lower interest rate, right?
Dave Ramsey points out that while that might be true, it does nothing to fix the behavior that got you into debt. What is the point of debt consolidation, if you continue to run up your credit cards, take out more loans, and purchase items you can’t afford? The only true way to get out of debt is to first get out of the debt behavior. I have seen this to be true, I have seen people consolidate their debt, only to consume more and more debt.
We realized that this was also is true in our lives. We paid off loans, got more, paid off those loans, and now have more. So where does the cycle end? We have never gone further than the debt snowball, so our new mentality has to be to push past the debt snowball, save up money and invest so that we no longer have to take loans on larger items, like cars, home renovations, or run up credit cards. So although the myth was about debt consolidation, it was still extremely applicable to our situation. This was a huge eye opener for us.
The next step goes hand in hand with the thought behind cutting out the behavior that got us into debt in the first place. The plasectomy. This is the act of literally closing your credit cards and cutting them up. That is so scary to me! The credit cards we do have are Lowe’s, Belk, and our actual bank credit cards.
After a long discussion about this step, we decided that we are doing a mental plasectomy. We still have them open, however, the Lowe’s and Belk cards are to only take advantage of the discounts that are offered when we do actually shop at these stores. And when we do shop at these stores it will be with the mentality that whatever we buy will essentially be bought with cash. As in, we will purchase with a discount, turn right around and pay the balance off to $0. Now, just for clarification, we do not shop at Lowe’s or Belk very often, so this is not difficult for us to do. Especially, with our personal spending money cut way down to knock out our debt snowball.
The hard part is our everyday credit card, that is what got us in trouble with the “We’ll pay it off right away”. We did not feel comfortable, at least not at this stage of the Dave Plan, to cut off our main credit card. Although we do have an Emergency Fund built up, we did not want to risk the possibility of something coming up that was more than our Emergency Fund could handle. We wanted to keep the credit card open for that reason, and we are holding each other accountable to only put purchases on the debit card, and we have been very successful with the help of EveryDollar’s budgeting and paycheck plan features! We feel that as we get further along on the baby steps, specifically Baby Step 3, where you save up 3-6 months of expenses for these exact reasons. Once we reach that point, we will revisit the conversation about the plasectomy!
This is probably the step that will take the most adjusting. Once we create a habit to budget accordingly, stick to that budget, and follow our mental plasectomy guidelines, I think the next steps will come a little easier. I guess that’s why they’re called Baby Steps!
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