The rich rule over the poor, and the borrower is slave to the lender. (Proverbs 22:7)
Debt is slavery. If you’re in debt, you understand.
Those student loans own you. They aren’t going away for decades at this rate. They’re eating up your income and they rob your ability to save and get ahead.
It doesn’t matter what type of debt it is – credit card, car loan, student loan, even your mortgage. They all enslave. If you’re not convinced, stop paying on any of them and see what happens. Actually, please don’t do that.
There is a better way and it’s called the Debt Snowball.
First, let’s be clear about the objective of the Debt Snowball. It’s designed to help you get out of debt as quickly as possible.
And let’s be clear about what the Debt Snowball isn’t. It isn’t the formula to pay the least amount of interest. It isn’t the method to achieve the most wealth by leveraging your investments. It has nothing to do with negotiating with creditors or escaping what you owe.
How does it work?
You list all of your debts from smallest balance to largest balance with the minimum payments. Don’t even worry about the interest rates.
| Debt | Balance | Minimum Payment |
|---|---|---|
| American Express | $2,000 | $20 |
| Visa | $3,000 | $30 |
| Discover | $5,000 | $50 |
| Student Loan 1 | $8,000 | $80 |
| Student Loan 2 | $10,000 | $100 |
| Student Loan 3 | $12,000 | $120 |
| Student Loan 4 | $14,000 | $140 |
| Car Loan 1 | $16,000 | $160 |
| Car Loan 2 | $20,000 | $200 |
| Home Equity Loan | $40,000 | $400 |
| Total | $130,000 | $1,300 |
You take this issue as seriously as it deserves and get to work
Allow no sleep to your eyes, no slumber to your eyelids. Free yourself, like a gazelle from the hand of the hunter, like a bird from the snare of the fowler. Go to the ant, you sluggard; consider its ways and be wise! It has no commander,no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest. How long will you lie there, you sluggard? When will you get up from your sleep? A little sleep, a little slumber, a little folding of the hands to rest— and poverty will come on you like a bandit and scarcity like an armed man. (Proverbs 6:4-11)
It’s time to really work. This probably means a second job at night and on the weekends. If you think you can make more money in your current job, then prove it. Work harder than you ever have where you are. Work those nights and weekends there. Then go ask for a raise when you’ve earned it!
You sell and cancel everything you can live without. You don’t really need the SUV. You definitely don’t need cable! And while you’re at it, sell the TV.
I hope you’re still reading. I know this might sound harsh, but you have to consider the alternative. It’s decades of slavery. It’s putting the same chains on your children. It’s constant stress on your marriage. It’s working in jobs you don’t enjoy to pay these debts. It’s guilt every time the offering plate goes around.
Here’s the cool thing, though. If you commit. If you come up with a plan to free yourself, you can do it. It might take 5 or 7 years, but after that you’ll be free! You’ll have your life and your income back. And you’ll be stronger.
Now you apply every extra dollar to the lowest balance debt and start your Snowball (let’s say it was an extra $1,000/month):
| Debt | Balance | Minimum Payment | Snowball Payment |
|---|---|---|---|
| American Express | $2,000 | $20 | $1,020 |
| Visa | $3,000 | $30 | $30 |
| Discover | $5,000 | $50 | $50 |
| Student Loan 1 | $8,000 | $80 | $80 |
| Student Loan 2 | $10,000 | $100 | $100 |
| Student Loan 3 | $12,000 | $120 | $120 |
| Student Loan 4 | $14,000 | $140 | $140 |
| Car Loan 1 | $16,000 | $160 | $160 |
| Car Loan 2 | $20,000 | $200 | $200 |
| Home Equity Loan | $40,000 | $400 | $400 |
| Total | $130,000 | $1,300 | $2,300 |
You don’t need a calculator to see that things start happening. In 2 months, you knock out your American Express credit card. In 3 more months, you pay off the Visa. After just 10 months, you’ve paid off all 3 credit cards! Yes, this is oversimplified and going faster without the interest payments, but you get the point.
Two important things happen as you start paying off debts.
First, you get to add the payments from the debt you paid off to your Snowball payments so that you keep paying more and more. For example, after 3 credit cards in 10 months, your Snowball payment is now $1,100/month vs. $1,020. Hence, “Snowball”.
Second and probably more important, you get positive feedback. You start to build behavioral and emotional and spiritual momentum. This is the underappreciated snowball effect.
As you see those debts disappear, you get fired up. The extra hours at work, the missing prime time series, the rice and beans all start to have real value. That overtime shift equals 1 less month of debt and it becomes easy.
If you’ll put aside your excuses. If you’ll stop fretting over the interest rates and trying to tackle college savings, retirement, and other financial goals, and just focus on the debt snowball, it will work.
It may take several years, but you may find it only takes a few. And then there will be no debt outstanding. There will be no bondage.
Let no debt remain outstanding, except the continuing debt to love one another, for whoever loves others has fulfilled the law. (Romans 13:8)
