Dave Ramesy Debt Snowball minimum payments?

[rszdtrvl]

We are slowly starting this.

We have step 1 done.

Now we are working on step 2 : Debt Snowball.

We are supposed to make minimum payments and put the extra onto the lower debt, right? We have 2 debts beside the mortgate right now :
-- Visa Card ($4300.00) - minimum payment is around $74/mo (I believe)
-- Car payment ($3253.00) - monthly payment is $182.00

So.... I need to start with the car, right? I make the minimum payment on the visa card, and put the rest of the budgeted amount of that bill towards the car payment?

I have budgeted out $150 for the Visa. Instead of paying that amount, I pay the $74, right?

And instead of paying the $182 for the car, I add an additional $75 to that payment, right?

So the money is budgeted out just fine, but that debt will vanish quicker? And then I will put the total $322 (amount for car payment and credit card budgeted amount) on the visa when the car is paid off, right?

I am slightly confused, as the car is the lower debt, but the credit card debt interest is a couple points higher (all of our credit cards, except department store ones, have less than 10% APR).

I am doing this the right way, right?

And I keep putting money in savings, right? No matter what? Because the money that I was paying on the car payment and credit card will eventually be moved into the amount put into the savings account, right?

I think I have things figured out, but if someone can confirm that I am headed in the right direction, that would be great.

Oh, and I always add to savings every month, right? Just like another monthly bill, only to ourselves, right? It seems like the debt would be paid off quicker if I didn't put the savings account money into savings, but towards the debt. But I want to do this the right way.

Thanks for bearing with me. I have a habit of being a bit overbearing. LOL

 

[mrsklamc]

That is the theory, yes.

The reason DR says to pay off the smaller debt instead of the lower interest one is that if you have, say, 10 debts, and can knock out 7 small ones fairly quickly, it makes you feel great and helps you stay motivated.

DR is GREAT but if you just have those two, honestly, I'd knock out the credit card first because of the higher interest- unless you are in any danger of defaulting. In that case, I'd do the car first because the credit card is unsecured and honestly if you didn't have the money their would be nothing they could do but mess up your credit.

 

[minnie1928]

Since your 2 debts are relatively close in balance, I would go after the higher rate account (your credit card). His pay the lower amount first philosophy is to help you maintain your motivation...to make you feel like your accomplishing something as the smaller accounts are paid off. However, since your accounts are so close in balance, that's not going to really impact you the same way. Go for the higher interest one and pay that off first.

 

[rszdtrvl]

Okay, great!

I had planned that anyway, as I had budgeted double the minimum payment for that debt.

But following the guidelines, it would be car first.

I totally agree about them being so close and the higher interest, unsecured one credit card first.

Thanks so much!

 

[mrsklamc]

I missed the part about savings before. On this step, DR would say once you have your $1000 emergency fund, STOP putting money in savings, and throw that money at the debt instead.

This is because your savings likely is not getting anything near the interest on your debt, and savings will increase quickly enough when you're debt free.

 

[rszdtrvl]

Wonderful! I was wondering about the whole savings thing.

So...

The money alloted for savings will go onto the credit card.

Thank you!

 

[kellia]

Love DR! Definately get your $1000 first, it really is amazing how once you get that, you never "need" a CC again!

I'd pay down the CC first since the car at least has "value" if you needed to sell and will be paid off in a few years, while the CC minimum payments will continue until you die.

 

[bumbershoot]

Glad others addressed the savings! Whew.

The DR rule is that you work on the lowest total debt. This allows for "quick wins"...you knock out a debt fast, move that money towards the next, that one goes down fast, etc. This works best when there are many many debts. Obviously you're not in that situation, so it's not as obvious.

Although I haven't totally figured it out yet, I've been using whatsthecost.com to calculate the snowball and how long it will take to finish off the debts, and what extra money will do for it. You could throw your two bits of debt into the calculator, going by the DR method of lowest debt first, then doing it higher interest first, just to see what the difference will be. When you'll be done with each, depending on which is first, what the difference in interest will be, etc.

Have fun!