My household switched over to following DR’s Total Money Makeover plan (go to the library and check out the book and really read it) and as a result we have been cc (not cc debt, but cc) free for 4 years, have paid off a huge amount of debt, and will be totally debt free—including two mortgages and retired in less than 2 years.
I argued with the lowest balance debt and ignoring interest rates at first because it didn’t seem logical, and I am a math nerd big time. So when I heard DR on the radio say that the difference in the long run in interest paid out between the two methods was the cost of a Happy Meal I didn’t believe him and ran the numbers myself. He was right. In fact in my case doing the highest interest rate ones first was going to cost us MORE!
The advantages of doing lowest to highest are simple:
1.You see the debt falling faster when you pay the lowest balance first. The mental affect from that is not to be under estimated.
2.Once you pay off a cc you are less likely to use it again. Ideally you should destroy all cards immediately, but that is a hard thing for some people in the beginning. CC are their security blanket. If you haven’t destroyed the cards not wanting to restart a paid off debt is a great incentive and because you are aware of the high interest rates on the ones remaining you are less likely to use those as well.
3.In the beginning you generally only have a few dollars extra per month to throw at debt. So you throw it where you see it doing the most toward a zero balance. $10 on a $1,000 balance is only 1/100 of that balance but $10 on a $100 is 1/10. The mental effect of that is tremendous.
4.Once you pay off that $100, which probably had a $10 minimum payment due on it you suddenly have $20 per month EXTRA to pay on the next lowest bill and that $20 PLUS its normal payment really seems to pack a wallop on that second bill, by the time you hit bill #3 you are on a roll and the total debt is dropping quickly. Most folks find that because of this snowball by the time you are a few bills down the hill their debts start falling off one or two every few months. I know on my own snowball chart I have 3 major what were originally high interest cc/loans that will fall off in a 45 day period in the next few months. That is HUGE. I recommend you download the snowball chart from the group files and see the speed you could be debt free by paying just minimums and snowballing. Then plug in the amount you KNOW you could pay extra every month and see how much even a little bit extra could make in the outcome.
5.You get caught up is pushing toward getting those last few payments made on the “pet” or smallest debt and find you are willing to do without, sell something, get a second job etc just to get it GONE and the fever spreads the closer you get to that goal.
6.Highest interest ones fall quickly once the snowball hits them. I’m paying on my highest interest one right now and the bill that was getting $110 minimum a month is now getting $500 PLUS all I can scrounge up. It will be gone no later than January 2014 and it wasn’t due to be paid off until late 2016 on the original plan. On the highest interest rate plan I would have never been able to more than $150 per month on it because I would have still been paying minimums on the lower bills.
7.Security. Life happens and if you should suddenly have a drop in income or lose it entirely (been there for 18 months after we started snowballing) you will have fewer minimum payments per month to come up wit and more importantly fewer creditors to deal with—that’s HUGE!
8.Like some one said DR recommends stopping 401K deposits if you have several years until retirement (our household is AT retirement age). If you are like us then he recommends only putting in what the company will match and killing the debt as much as possible as fast as possible. Once your are to the proper babystep then you put in 401K what the company will match and then put the remaining of whatever 15% of your income is in IRA it builds quickly.
College, the kids should be saving for it themselves right now if they are old enough to do summer or part time jobs. They should also be doing all they can to get scholarships. Not just grades, but community service, school clubs etc. It all goes toward getting a scholarship. Also don’t push college, it’s not right for everyone. Trade schools can lead to good paying jobs and cost far less. IF they are interested in a trade school job field then skip college altogether and send them to an accredited trade school.
If college is in the future, then have them take courses for free in high school that will give them college credit. Both my kids clepted out of foreign language, math, English, science and some computer skills classes and saved thousands in tuition fees and books—they also bought used books and then sold them to the next class after they were finished with them.
Also, they need to get a college degree with a future. I love my ds deeply but his Music Composition degree isn’t what pays his bills. That degree will have cost nearly $100,000 by the time he finishes paying for it (his only remaining debt) and it’s his $2,000 AutoCad drafting degree from the local community college that is paying off the MC degree.
Dentist? I have, like others, bartered away many a doctor bill with sewing. DD pays with computer skills, ds has written a few songs for special events (his only income from that MC degree to date), dbil did handy man work for part of dsil’s cancer treatment. It can be done. But like it was said, talk directly to the dentist, bookkeeping will get you nowhere.
In the meantime, set up a dental sinking fund in your monthly budget, even if it is a small one and then when the time comes offer that cash for payment in full. You might just get a happy surprise. It saved us over $1,000 on a hospital bill. Most doctors, dentists, hospitals etc have a set amount they will discount for cash payments.
Also shop around and let it be known you are shopping around. Rates have a way of changing if they realize you may take your business elsewhere.