THE “SCARED STRAIGHT” SNOWBALL DEBT REDUCTION PLAN
Basically, the plan is to make minimum payments on all your debt and pile your remaining get-out-of-debt money into a high-yielding savings account such as the one offered by Smarty Pig. When the balance in that savings account exceeds the balance of your smallest debt by 30%, the snowball plan calls for you to transfer the money into checking and eliminate that smallest debt.
As Trent points out this is probably not the smartest (mathematically) way to approach the debt snowball, but for those of us with somewhat shaky jobs, or in one-income families, it makes for a better night’s sleep to have a few thousand in savings at any given time. I’d gladly give up a couple months worth of interest to have a pile of money in the bank at the ready.
I may make one slight variation to his plan and preserve a $1,000 savings threshold – so when my savings balance equals my smallest debt, plus $1,000, I will bring the savings balance down to $1,000 and pay off the debt. Another idea to consider if you have several smaller debts (like I did in the beginning) would be to group those debts together to make one larger debt.
For instance, I had three debts under $500. If I was using the “Scared Straight” plan back then I would have grouped them into one $1,300 debt and used that as my target savings amount, otherwise you’ll be making several transfers out of your high-yield savings account to pay down the debt snowball, and it could cause a fee to be assessed on your savings account.
THE ORIGINAL DEBT SNOWBALL PLAN
The original debt snowball plan was made popular by Dave Ramsey in one of my favorite personal finance books and New York Times bestseller, The Total Money Makeover. If you haven’t read the book, I highly recommend it.