Years ago I found myself reading one of Dave Ramsey’s books. I can’t remember which book it was, but in it he discusses what he calls the Debt Snowball. Essentially, as I understood it, debt snowball is a method of paying off debt whereby the main objective is to free up cash flow as quickly as possible by getting rid of monthly minimum payments so that this money can be “rolled” into the next step thereby compounding the result.
With this goal in mind, in lieu of starting the ball rolling with the largest debt amount and the most expensive debt in terms of interest, or making simultaneous payments on all of your debt, which most of us would gravitate toward doing, it may make sense to begin with the smallest and therefore easiest to pay off balance. For example, if you have 3 credit cards with balances of $1,200, $4,000, and $7,000, you would throw all of the available to you resources into first paying off the $1,200 card – regardless of what the terms are. This is because:
- You are most likely to “see it through” and not be overwhelmed, and
- Once paid off, the freed-up minimum payment can be applied toward the next debt – in line, making it easier to pay-off larger amounts; and so on and so forth. In the world of compounding, time is of the essence and getting your hands on an extra $80/month within 1 year is better than collecting $300/month after 7 years…so goes the logic.
The Mortgage Debt Snowball
Having read this, it became apparent to me that the same principal could be applied to paying off mortgage debt. Suppose that you own 10 buildings in your portfolio and you have a mortgage associated with each for a …read more