When I say ‘debt elimination plan’, I mean a plan in addition to your budget to knock out credit card and loan debt as quickly as possible. All of the methods listed will work, but the actual process involved differs slightly.
To illustrate this, we’ll use 5 debts which include 3 credit cards, a Stafford student loan and a car loan. The total of minimum payments is $515 per month, and to start with any of these methods, you’ll need extra money to get things rolling. Let’s say you’re able to come up with $150 extra per month to go toward debt, making the total available amount $665 ($515 + $150).
The ‘Months Left’ column contains 2 numbers. The first number is for the purpose of calculating the order of Dave Bach’s DOLP method without the interest factor. The second number is the actual number of months it would take to pay the loan off with the minimum payment, including the interest.
Dave Ramsey’s Snowball by Balance
In this debt elimination plan, debts are arranged by balance from lowest to highest, just like in the example shown above. The additional $150 dollars will be added to the first debt, making the payment $160.
Look at the difference! Instead of nearly four years with the minimum payment of $10, the debt will be knocked out in just 3 short months. Once it’s paid off, then the $160 payment moves to the next debt:
This card will be paid off in just another four months (7 – 3) by adding that $160 to the minimum payment of $20. Once that is paid off, the $180 moves to the next debt and so on…
By the time this snowball is done – you’ll have paid everything off in 2.5 years, versus 6.5 and saved thousands in interest. You can see why that $150 additional amount was so important.
You can also arrange this snowball by interest rate, highest to lowest and you’ll save even more, but getting those lower balances knocked out quickly builds the excitement and incentive needed to stick with it. Psychologically, the balance method works better.
Suze Orman’s Method
Now let’s look at Suze Orman’s debt elimination plan.
The first step is to arrange debts by interest rates – highest to lowest. Then add $10 to each minimum payment. Whatever is left over (in this instance – $100) is applied to Nordstrom’s minimum payment making it $130. The snowball method is followed from there on out.
The problem with this method is depending on how many debts you have, you may not have enough money to do this. If you have 17 debts, you would need an additional $170 just to add the $10 a month for each payment, but you only have $150 so that’s not going to work.
David Bach’s DOLP Method
The DOLP (done on last payment) debt elimination plan lists debt in order of how many payments are left regardless of balance or interest rate. To figure out the number of months without interest, simply divide the balance by the minimum payment. For instance $350 / $10 = 35 months. Arrange the debts in months left order – lowest to highest and apply the snowball method.
I want to point out that interest does matter in terms of how long it will actually take to pay a debt off, so this method relies on getting your creditors to lower the interest rate (read Dave Bach’s Debt Free for Life book for all the details). The Nordstrom card at 23.5 percent interest has an unrealistic number of months at 37, but hopefully you can get that rate lowered.
I want to make sure you understand that these happen to be the numbers for this particular scenario. It would behoove you to use your own debts and crunch the numbers to see which method would work best for you.
Here is a link to an excellent and free snowball spreadsheet on the internet for you to do play around with:
http://www.vertex42.com/Calculators/debt-reduction-calculator.html
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