Financial Peace University Week 4: Snowball the Debts

This week’s class and lesson were also very insightful, although I’ll admit – the cash flow course had me pretty fired up about managing our money better, and was my favorite week so far.

In week 4, Dave Ramsey discusses some of the common myths surrounding debt, such as that you need a credit score to get ahead, that you’ll always have a car payment, that you’ll always have a mortgage payment, etc. According to Dave, these are all myths, and he discusses the history of credit and some of the marketing strategies that companies use in order to get you more into debt.

It’s also interesting to look at where we, as a society, stand about debt. Most of us do have a car payment and it seems as if those payments are getting higher and higher. Dave actually sprouted some numbers that say the average American has a $490 car payment financed over 63 months. New cars are expensive and also depreciate in value, yet we continue to buy new cars.

Other interesting bits that Dave brought up are the following scenarios….

–          Walk into a branch of your bank to make a deposit or withdrawal and see what types of products the bank staff tries to cross-sell you on. Don’t have one of their credit cards? They might try to pitch one to you. How about sitting down to meet with one of their investment professionals? They’ll try to sell you a myriad of products that you may or may not be interested in. Bank staff are actually paid and incentivized to cross-sell products to you, so that they can make more money off of you.

–          Go to a retail store and try to check out for a purchase. They’ll ask if you’re using your “X” Store card today for payment. If you say no then they launch into explaining why you should apply for one. Did you know that retail workers in department stores, hardware stores, etc are trained and graded on selling you a credit card?

These are just a few of the examples Dave listed. A lot of them made me stop and think and I have to say that this was the funniest Dave video lesson we’ve seen yet. There were many humorous analogies and jokes throughout this lesson and that helped tremendously.

Of course, getting out of debt is one major thing that Dave Ramsey is known for, so imagine my surprise when the infamous “Debt Snowball” strategy was introduced in the last 10 minutes of the 1 hour, 15 minute video. The debt snowball itself is pretty self explanatory once he lays out the ground rules so perhaps that’s why much time wasn’t spent on it. The idea behind the debt snowball is:

1)      List all of your debts, smallest balance to largest.

2)      Pay minimum payments on all of your debts and use any extra money in your budget (or that you can make from side jobs, selling items, or applying extra savings to) to throw as much money as possible at the smallest debt.

3)      Once the smallest debt is paid off, apply the payment from the smallest debt (that’s now gone) plus whatever extra money is in your budget to the next largest debt, and so on, until all debts are paid.

Dave recommends that people concentrate fully on debt payoff in order to completely focus on that one financial goal. For some people with large debts, this can take several years, so staying motivated is key. One of the best ways to do this is by accomplishing and celebrating the “small wins” by paying off the smaller debts first and seeing traction in your debt payoff. For my husband and I, we’ll be able to gain some nice traction on our debts in the first few months of working on the debt snowball, and should have our smaller, consumer debts all taken care of by Christmas. At that point we’ll be able to start diving into our larger debts: an auto loan and our student loans. Wish us luck!