To make the snowball even more powerful, Jim could add to his total monthly debt payments. Doing this creates an ever-accelerating snowball of debt reduction. There are other ways to order the debts, though.) What matters is that as you eliminate each debt, you keep your total debt payments steady. (With Dave Ramsey's version, you repay debts with low balances first. With the debt snowball, the order in which Jim repays his debts is irrelevant. He never drops his debt payments below $500 per month, even when his total minimum payments are far lower.
This pattern continues until all of Jim's debts have been repaid.Again, Jim keeps his total debt payments at $500 per month, throwing an extra $220 per month at whichever debt he chooses. Now his minimum payments total $280 per month. Now let's assume Jim pays off a second debt, eliminating one $120 minimum payment.He keeps them at $500 per month, applying that extra $100 beyond the minimum payments to the debt of his choice. With the debt snowball, however, Jim doesn't reduce his debt payments to $400. Now his minimum payments total $400 per month. When Jim repays his first debt, let's say one $100 minimum payment disappears.Each month, he pays this $500 total toward his debts. The minimum payments on his debts come to $500 per month. This term - popularized (but not invented) by Dave Ramsey - describes a method for rapidly repaying debt. Most of you are probably familiar with the debt snowball. To better explain the wealth snowball, it might help to first review the concept of the debt snowball. Your wealth snowball is your nest egg, your net worth. What on earth is a wealth snowball? It's the ever-increasing stash of cash you have in your banking and brokerage accounts as you boost your saving rate and earn returns on your investments. If you spend less than you earn, you'll build a wealth snowball that will allow you do do the things you dream of doing and to have the things you dream of having. (The complicated part, the tough part, is developing the skills and mental fortitude to make this happen.) The answer to every financial problem is to increase the gap between your earning and spending. It's reassuring to believe that the answer to your financial woes is somehow more complex.
It sounds too basic, too facile and simplistic. Spend less than you earn - that's the basic rule of personal finance. I now believe know, for instance, that the single most important thing you can do to improve your financial situation is also the most elementary: Increase the gap between your earning and spending. Today, I want to talk about building a wealth snowball.Īfter nearly twelve years of writing about money, I've gone from not knowing anything to having some very strong opinions.
To conclude “back to basics” month at Get Rich Slowly, today we're going to explore an important concept, one that's new to most people.
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