فصل 07

7 The Debt Snowball: Lose Weight Fast, Really

Your Total Money Makeover is dependent upon using your most powerful tools. I believe with everything within me that your most powerful wealth-building tool is your income. Ideas, strategies, goals, vision, focus, and even creative thinking are vastly important, but until you get control and full use of your income to build wealth, you will not build and keep wealth. Some of you might inherit money or win a jackpot, but that is dumb luck, not a proven plan to financial fitness. To build wealth, YOU will have to regain control of your income.

The bottom line is that it is easy to become wealthy if you don’t have any payments. You may get sick of hearing it, but the key to winning any battle is to identify the enemy. The math is revealing. The typical American with a $50,000 annual income would normally have an $850 house payment and a $495 car payment, with an additional $180 payment on the second car. Then there is a $165 student-loan payment; and the average credit-card debt is about $12,000, making those monthly payments around $185 per month. Also, this typical household will have other miscellaneous debt on things like furniture, stereos, or personal loans on which they pay an additional $120. All these payments total $1,995 per month. If this family were to invest that instead of sending it to the creditors, they would be cash mutual-fund millionaires in just fifteen years! (After fifteen years, it gets really exciting. They’ll have $2 million in five more years, $3 million in three more years, $4 million in two and a half more years, and $5 million in two more years. So, they will have $5 million after twenty-eight years.) Keep in mind, this is with an average income, which means many of you make more than this! If you make $50,000 and have fewer payments, you have a head start, since you already have more control of your income than most people.

With a take-home pay of $3,350, could you invest $1,995 if you had no payments? All you have to pay for are utilities, food, clothes, insurance, and other miscellaneous expenses. That would be tight, but doable. If you do that for just fifteen years, you will have a pinnacle experience. I will explain that later.

Many of you listening this are convinced that you could become wealthy if you could get out of debt. The problem now is that you are feeling more and more trapped by the debt. I have great news! I have a foolproof, but very difficult, method for getting out of debt. Most people won’t do it because they are average, but not you. You have already figured out that if you will live like no one else, later you can live like no one else. You are sick and tired of being sick and tired, so you are willing to pay the price for greatness. This is the toughest of all the Baby Steps to your Total Money Makeover. It is so hard, but it is so worth it. This step is where all your broke friends and relatives will make fun of you (or join you). This step requires you to shave your head and drink the Kool-Aid. Just kidding, but not by much. Your focused intensity has to go off the scale.

If you really believe that wealth building will no longer be a dream but a reality if you have no payments, you should be willing to do bizarre and sacrificial things to have no payments. Time to pay off the DEBT!

Baby Step Two: Start the Debt Snowball

The way we pay off the debt is called the Debt Snowball. The Debt Snowball process is simple to understand but will require truckloads of effort. Remember what my pastor said: “It isn’t complicated, but it is difficult.” We have discussed that personal finance is 80 percent behavior and 20 percent head knowledge. The Debt Snowball is designed the way it is because we are more concerned with modifying behavior than correct mathematics. (You’ll see what I mean shortly.) Being a certified nerd, I always used to start with making the math work. I have learned that the math does need to work, but sometimes motivation is more important than math. This is one of those times.

The Debt Snowball method requires you to list all your debts in order of smallest payoff balance to largest. List all your debts except your home; we will get to it in another step. List all of your debts—even loans from Mom and Dad or medical debts that have zero interest. I don’t care if there is interest or not. I don’t care if some have 24 percent interest and others 4 percent. List the debts smallest to largest! If you were so fabulous with math, you wouldn’t have debt, so try this my way. The only time to pay off a larger debt sooner than a smaller one is some kind of big-time emergency such as owing the IRS and having them come after you, or in situations where there will be a foreclosure if you don’t pay it off. Otherwise, don’t argue about it; just list the debts smallest to largest.

The reason we list smallest to largest is to have some quick wins. This is the “behavior modification over math” part I referred to earlier. Face it, if you go on a diet and lose weight the first week, you will stay on that diet. If you go on a diet and gain weight or go six weeks with no visible progress, you will quit. I don’t care if you have a master’s degree in psychology; you need quick wins to get fired up. And getting fired up is super-important.

When you pay off a nagging $52 medical bill or that $122 cell-phone bill from eight months ago, your life is not changed that much mathematically yet. You have, however, begun a process that works, and you have seen it work, and you will keep doing it because you will be fired up about the fact that it works.

After you list the debts smallest to largest, pay the minimum payment to stay current on all the debts except the smallest. Every dollar you can find from anywhere in your budget goes toward the smallest debt until it is paid. Once the smallest is paid, the payment from that debt, plus any extra “found” money, is added to the next smallest debt. (Trust me, once you get going, you will find money.) Then, when debt number two is paid off, you take the money that you used to pay on number one and number two and you pay it, plus any found money, on number three. When three is paid, you attack four, and so on. All the money from old debts and all the money you can find anywhere goes on the smallest until it is gone. Attack! Every time the Snowball rolls over, it picks up more snow and gets larger, and by the time you get to the bottom, you have an avalanche.

Most people get to the bottom of the list and find that now they can pay well over $1,000 per month on a car loan or a student loan. At that point, it won’t take long to bust out and be debt-free except for the house. That is Baby Step Two: Use the Debt Snowball to become debt-free except for your home.

The major elements of making the Debt Snowball work are using a budget, getting current before you start, smallest-to-largest payoff (no cheating), sacrifice, and focused intensity. Total, sold-out, focused intensity is possibly the most important. This means saying to yourself (and meaning it), To the exclusion of virtually everything else, I’m getting out of debt!

Proverbs 6:1 and 5 (loosely Dave-paraphrased) says, “If you have signed surety, my son, [surety is Bible talk for debt] . . . deliver yourself like the bird from the hand of the fowler and the gazelle from the hand of the hunter.” I remember reading that Bible verse in my daily Bible study one day and thinking what a cute little animal metaphor it was for getting out of debt. Later that week I was surfing channels and hit the Discovery Channel. I noticed they were filming gazelles. The gazelles were peacefully gazelling around. Of course, you know the Discovery Channel wasn’t there just for the gazelles. The next camera shot was of Mr. Cheetah sneaking up in the bushes looking for lunch in all the right places. Suddenly, one of the gazelles got a whiff of Mr. Cheetah. The other gazelles noticed the alarm and soon also were on edge. They couldn’t yet see the cheetah, so out of fear of running at him, they froze until he played his cards.

Realizing he had been discovered, Mr. Cheetah decided to give it his best shot and leaped from the bushes. The gazelles all yelled, “Cheetah!” Well, not really, but they did run like crazy in fourteen different directions. The Discovery Channel that day reminded viewers that the cheetah is the fastest mammal on dry land; he can go from zero to forty-five miles per hour in four leaps. The show also proved that because the gazelle will outmaneuver the cheetah instead of outrunning him, the cheetah will tire quickly. As a matter of fact, the cheetah only gets his gazelle burger for lunch in one out of nineteen chases. The gazelle’s primary hunter is the fastest mammal on dry ground, yet the gazelle wins almost every time. Likewise, the way out of debt is to outmaneuver the enemy and run for your life.

The way out of debt is to outmaneuver the enemy and run for your life.

An obvious step to working the Debt Snowball is to stop borrowing. Otherwise, you will just be changing the names of the creditors on your debt list. So you must draw a line in the sand and say, “I will never borrow again.” As soon as you make that statement, there will be a test. Trust me. Your transmission will go out. Your kid will need braces. It is almost as if God wants to see if you are really gazelle-intense. At this point, you are ready for a plastectomy—plastic surgery to cut up your credit cards. A permanent change in your view of debt is your only chance. No matter what happens, you have to pursue the opportunity or solve the challenge without debt. It has to stop. If you think you can get out of debt without huge resolve to stop borrowing, you are wrong. You can’t get out of a hole by digging out the bottom.

Sometimes your Debt Snowball won’t roll. When some people do their budget, there is barely enough to make all the minimum payments and nothing extra to pay on the smallest. There is no push to get the Snowball rolling. Let me offer another image to help you better understand this problem and the solution. My great-great-grandfather ran a timber operation in the hills of Kentucky and West Virginia. In that bygone era, after cutting the timber, they would put the logs into the river to float them downstream to the sawmill. The logs would build up at a bend in the river, and a traffic jam of wood occurred. Sometimes the loggers could break the jam loose by pushing the logs. Other times they would have to get radical before a real mess occurred.

When it got bad, they would break the logjam by throwing dynamite into the middle of the logs that were blocking the progress. As you can imagine, this created a dramatic effect. When the dynamite blew, logs and pieces of logs would fly into the air. After working so hard to cut the trees, some of them were a total loss. They had to blow up some of the timber to get the rest of the crop to market. That’s the sacrifice the situation required. Sometimes that is what you have to do with the stopped-up budget. You have to dynamite it. You have to get radical to get the money flowing again.

One way to do that is to sell something. You could sell lots of little stuff at a garage sale, sell a seldom-used item on the Internet, or sell a precious item through the classifieds. Get gazelle-intense and sell so much stuff that the kids are afraid they are next. Sell things that make your broke friends question your sanity. If your budget is stopped-up and your Debt Snowball won’t roll on its own, you are going to have to get radical.

In watching heroes across the nation get out of debt with gazelle intensity, believe me, I have seen them sell things. One lady sold 350 goldfish from her pond for a dollar apiece. Men have sold their Harleys, boats, knife collections, or baseball cards. Ladies have sold precious things like nonfamily antiques (keep the heirlooms because you can’t get them back). I don’t recommend selling your home unless you have payments above 45 percent of your monthly take-home pay. Usually, the home isn’t the problem. I do recommend that most people sell the car with the most debt on it. A good rule of thumb on items (except the house) is this: if you can’t be debt-free on it in eighteen to twenty months, sell it. If you have a car or a boat that you can’t pay off in eighteen to twenty months, sell it. It is just a car; dynamite the logjam! I used to love my car, too, but I found keeping that huge debt while trying to get out of debt was like running a race wearing ankle weights.

The number of people I talk to about this who will not throw dynamite into their logjam to get the money flowing makes me sad. They can see that the logs will never get to market, they will never have wealth, but they just can’t stand the thought of blowing up a few of them so the rest will get down the river. Translation: “I love my stupid car more than the idea of becoming wealthy enough to give cars away.” Don’t make that mistake.

More income will break up your logjam. If your budget is too tight to get the Debt Snowball rolling, working extra hours can increase income in order to increase the speed of debt repayment. I don’t like the idea of working one hundred hours per week, but sometimes extreme situations require extreme solutions. Temporarily, just for a manageable period of time, the extra job or overtime may be your solution.

I picked up a pizza one night, and as the guy behind the counter started walking toward his car with a stack of pizzas to be delivered, he saw me and stopped. Smiling, he said, “Hey, Dave, I’m here because of you. Only three more months, and I’m debt-free!” This was not some seventeen-year-old teenager; this was a dad, a thirty-five-year-old guy who wants to be free. There is a young single guy who works on my team. He is gazelle-intense about becoming debt-free. He works here until 5:30 every day, and he smiles as he leaves to work for UPS for another four or five hours virtually every night.

Why are these guys all smiling? They work hard and unbelievable extra hours, so why would they smile? They smile because they have caught the vision, the vision of living like no one else so later they can live like no one else.

What About Saving for Retirement While the Snowball’s Rolling?

Matt asked me on the radio show about another subject people have trouble with on Baby Step Two. Matt wanted to know if he should stop his 401k contributions to get his Debt Snowball moving. He really didn’t want to stop contributing, especially the first 3 percent because his company matches that 100 percent. I am a math nerd, and I know the 100 percent match is sweet, but I have seen something more powerful— focused intensity. If you are going to be gazelle-intense and do everything in your power to become debt-free very quickly, then stop your retirement plan contributions, even if your company matches them.

If you are radically gazelle-intense, the speed of your debt freedom will enable you to return to that 401k with the match in just a matter of months. Imagine how much you’ll be able to contribute without payments. The average person who throws the dynamite and is gazelle-intense will be debt-free except for his or her home in eighteen months. If for some reason you are stuck in an extremely deep hole, you may want to continue doing some retirement saving. An extremely deep hole is NOT defined by your unwillingness to apply yourself.

Penny’s air conditioner went out in the dead of summer. The repairs were $650, which she took from her emergency fund. Now what does she do? Penny needs to put the Debt Snowball temporarily on hold. She will continue to make minimum payments and go back to the first step until she gets back up to $1,000 in her emergency fund. If she doesn’t, soon she will have nothing in savings, and when the alternator on the car goes out, she will reopen some credit-card account. The same applies to you. If you use the emergency fund, return to Baby Step One until you have re-funded your beginner emergency fund, then move right back to your Debt Snowball, Baby Step Two.

Because of debt-consolidation loans and other mistakes, many people have a home equity loan or some kind of large second mortgage. What should be done with this loan? Is it put in the Debt Snowball, or just called a mortgage and not dealt with at this step? Generally speaking, if your second mortgage is more than 50 percent of your gross annual income, you should not put it in the Debt Snowball. We will get to it later. If you have a small-business loan or have borrowed on your credit cards for business, this is personal debt. Treat small-business debt like any other kind of debt. List it with all your other debts, smallest to largest, in the Debt Snowball. If your business debt is larger than half your gross annual income or half your home mortgage, hold the payoff on that size debt until later.

The only other larger debts to delay are mortgages on rental properties. Stop buying more rental property, but hold that debt until later. After your home mortgage is paid off in a later Baby Step, you should Snowball your rental mortgages.

Other than the home mortgage, larger second mortgages, business loans, and rental mortgages are the only things that aren’t paid off in Baby Step Two. If you are fired up, normally this will happen within eighteen to twenty months. Many people find a way to shorten the time with sheer intensity, and God tends to pour blessings on people going in a direction He wants them to go.

The Debt Snowball is very possibly the most important step in your Total Money Makeover for two reasons. One, you free up your most powerful wealth-building tool, your income, during this step. Two, you take on the entire American culture by declaring war on debt. By paying off your debt, you show that The Total Money Makeover of your heart has occurred, paving the way for a Total Money Makeover of your actual wealth.