Saturday, February 28, 2009

Different Debt Snowball Plans - What Works For You?

So, I read a post last week that kind of peaked my interest. It was "Recession Proof Your Debt Snowball" by Frugal Dad. His twist on the classic Pay Off Your Debts Snowball plan is to pay minimum payments on his credit cards and put the maximum amount in his emergency fund. When he has enough (over his emergency fund base amount) he writes one whole check and pays off the balance in full. I like the idea, I really like the idea - but I am really glad I didn't read it 9 months ago.

I started this whole journey of choosing to get an extra $900 over my regular income per month to avoid foreclosure back in June. If I had seen his post then, I would have been tempted to do the same thing, except I see a few problems I personally might have run into with his plan. The first would have been that I might have dipped into that cash on months I didn't make my goal. I realize that that is part of his point - that if you do have an emergency, you have the cash to cover it, but let's just say my qualification of what an emergency is has changed a lot in 9 months. As it is now, that credit card debt (which was accumulated through my divorce) is under $450.00. (yay!!) I am paying a ton on it in order to get it wiped out so I can use that money towards my other monthly goals instead. I don't know if I would have done nearly so well at eliminating the debt this quickly had I used his plan.

Another problem would have been a concern that one of his commentors had - I might have had a really hard time writing that check even once I hit my goal. Having an emergency fund is so wonderful for my peace of mind, being as my situation changes from month to month based on how much money I can bring in, I might have been tempted to leave it there and not pay off the debt. Not the smartest move perhaps, but one I could see myself doing.

So, I won't be using his plan to pay off my debt. That one card is the only consumer debt I have and my car loan will be paid off about the same time. So once those two things are out of the way, the only debt I will have is my big fat mortgages. However, I can see one or two applications for his plan...

Mainly, I think this would be a fabulous way for me to save up for things I want. I have a couple big home improvement projects that have to happen at home and at the cabin in the woods. I wish I could ignore them because with my financial state, that is really not where I want to put my money, but it is the kind of thing that if I don't fix it soon it is just going to get worse and worse and more and more expensive. If it is possible for me to do them this year, this would be a great way to pay for them without taking on too much debt. I don't know if I can, but stocking away money in the emergency fund is a good thing to do in any case. Even if this doesn't work out for me now, it is certainly something to consider for the future.

You know, I really can't wait for my car and credit card to be paid off. That will be such a relief. Both of those items will drastically effect the $900 number. Although... I still have some big goals. So, even if I could pay my mortgages without working hard to bring in extra income and being frugal on my spending, I don't know that I want to just take the pressure off and coast. Yes, having the weight off my mind will be nice, but until all my goals are met, I am going to keep on pushing. I've got too many things I want to do - too many goals to hit. Just making (or saving) $900 a month won't fund my emergency fund, get the house painted, or get me back in school. Nope, now that I know it can be done, I'm keeping that high target set.

Photo by: wajakemek


Kari said...

Good for you Dawn. It is important to constantly have goals and you are one of the few that do something about them.

K-money said...

It is a good goal to keep doing what you are doing even after you pay off the cc and car but it will be nice to have the extra flexibility.

As for the debt snowball, you just have go with what works for you because it isn't the same for every person. Congratulations on being almost to your goal.

Miss M said...

Actually this is how I tackled my CC and car loan debt. At the time I could earn 4%-5% in a savings account. I had transferred the credit balance to a 0% card and the car loan was 2.9%. I made money that way, I had no problem writing that check. Did I miss the big balance in my savings, a little bit. But I LOVED not having the monthly payment, trust me you will want to cross that finish line.

Dawn said...

Kari - Thank you so much! This blog really helps. It holds me responsible to those goals.

K-Money - You are right, each person has to do what is right for them. I loved Frugal Dad's idea, but I think it would be a good plan for the more disciplined me, but not so great for the old me, you know?

Miss M - that is AWESOME! One of the flaws to Frugal Dad's plan that he admitted was that there was the possibility you would lose money in interest. I don't think he had an account that paid more than the rate of his credit card. What you did was brilliant!

Kristy @ Master Your Card said...

Personally I wasn't a fan of Frugal Dad's method for myself, but I see its merit for those who do find value in it.

As for your goals, that's fabulous news that you've got it paid down so far and you're almost done! But, I agree with you that it's important to keep going. Even if you don't need the $900 every month anymore for debt, it's still good for other things.

But, I'm just curious. I don't know your entire financial situation, of course, so this could be totally inappropriate for you. But, have you considered a home equity? You've got the rest of your debts to pay off and the home improvement projects that you could combine all in one. I don't know what you're interest rate is on your car, but with home equity rates so low right now, maybe that's an option. At the very least, maybe it will help with the $900 per month. Just curious.

Dawn said...

Kristy, well frankly, I am mortgaged out the kazoo. (That'd be a good post, come to think of it.) I have two mortgages on BOTH houses. I bought during the whole "use a home equity loan and do a 80/20 loan with two different mortgages" phase. Sigh.... My credit card rate is actually quite low as is my car loan and both will be paid of in 3 months. WOOT! I may need a loan to get my house repainted, and I did find one for home improvements only that I might qualify for. Otherwise I can't really do anything else on the house - it is upside down as it is.