Beating Broke

Personal Finance from the Broke Perspective

Debt Avalanche? Correct?

By 15 Comments

There are many theories as to how best to pay off your credit card debt.  One, the Debt Snowball, was popularized by Dave Ramsey and has many followers.  In it, a borrower pays off the lowest balance rate card first and then “snowballs” the payment from that card onto the next lowest balance until they are all paid off.  One of the benefits of doing it this way is that you get a “quick win” when you pay off the first card.  And because you are “snowballing” the payments onto the next card, as the balances go up, so does the payment and your first “quick win” turns into another. Then another.

Flexo at Consumerism Commentary seems to think that that isn’t the best way to do it.  According to him, the method that he calls the “debt avalanche” is the “correct” way to pay off debt.  In this method, you arrange your debts in order of highest interest rate first to lowest interest rate last.  As you pay off your debts, you are saving more money on interest and paying the grand total off in a faster length of time because of it.  In his words:

By choosing the Debt Avalanche method, you will pay off your total debt faster, you will pay less interest, and you are mathematically efficient.

And he’s right.  Mathematically.  And if we are all robots, it will work for each and every one of us.  What he fails to do is take into account the human factor.  Let me make an example for us.

[Read more…]

Where We Began

By 6 Comments

I’ll spare you the pre-story except to say that my wife and I both did a lot of things wrong financially in our college years.  Lots of college loans, credit card debt, and little to no savings to speak of.  We got married, and still we continued on our merry way.  We bought a house long before we really could afford to and even added a dog.  Then we got pregnant and our financial inproprieties caught up with us.  We struggled and struggled and eventually, just months before the birth of our son, we saw the light.

Total Money MakeoverThat light, courtesy of a book called Total Money Makeover by Dave Ramsey, may have saved our financial lives.  Maybe we would have continued to barely make it, but we would have never made it to where we are now.  It’s been a little over a year since we started our makeover and we’ve seen some pretty amazing results so far.

When we started the plan, we were struggling financially.  Our debt to income ratio was well over 40% and the best we could do was to pay the minimum on everything and hope that there was still money in the bank when the checks came through.  All told, we had debt of over $100,000 and total income of less than $50,000.  We may have been on the verge of bankruptcy.  Our net worth was a horrible -$85000.  But we turned it around.

We started with a budget and built up a $1000 emergency fund.  We still have that $1000 in the bank earning interest at etrade.  We still use a budget every month.  We’ve paid off one of our cars, several credit cards and have moved a couple credit cards to 0% intro rates.  We’re nowhere near being out of the fire yet, but we are getting there.  Our one year review shows a net worth of -$58000.  An impressive increase.  It was helped by a nearly $10,000 increase in the value of our home, but still reflects the work we’ve put into our finances.

We’re on our way to financial independence and a debt free lifestyle.