Making sense of "Snowball" effect

So I'm in a debate with my wife over the best way to tackle our outstanding debt (aside from mortgage). Seems from reading other threads here there are some fairly smart money guys here.

We currently have 4 non-mortgage debts, with only my 22 Tundra having interest. Her car is 0% with 6 months left, and the other 2 are cards with 0% promotional periods that I intend to pay off before interest starts.

We also have $9,000 in cash that I just acquired selling a motorcycle, and already have a comfortable savings "safety net" for emergencies and so on.

I ran the numbers through some calculators online, and to me the best option seems to be using that $9,000 to wipe out the 2 cards early (even though 0%), and rolling the current monthly payments from those cards into my truck as additional principle each month. Doing that, and rolling her monthly car note into it as well in 6 months, will get the new truck paid off in 36 months, essentially making us "debt free".

She is stuck on saving that $9,000 and taking advantage of the 0% rates on the 2 cards, and starting the snowball effect once they are paid off at the promotional time frame. But doing it this way, the truck takes 46 months of payments before we are "debt free."

I'm trying to convince her the interest saved in the long run and the monthly funds saved over that extra 10 months of being "debt free" are worth it vs. taking advantage of the "Free money" 0% cards...

Thoughts?

 

I'm not seeing the issue here. You know the right answer. Do it. It is your job as head of the family to make the final decisions.

 

I like being debt free, but you essentially have a 0% loan by not paying those cards off. Do you have any way to securely and reliably invest it for that timeframe and earn more than 0%, then be able to withdraw without penalty to pay off the card when the time comes? Like a 6 mo CD through your bank.

 

How are your retirement savings? How about putting that $9k into a mutual fund?

 

If he pays off the cards that is just more money per month that he can invest, which will eventually build a larger portfolio than if he keeps paying the cards.

 

While I may be the bread winner, she actually works in a payroll setting and handles our checkbook and budget. I usually keep my nose clean of it unless I see an obvious issue, like I do here. Basically wanted to make sure I wasn't being short sighted to the bigger picture...

I hadn't thought of a short term CD or the similar product. I could certainly do some quick research and compare any interest earned on that vs. the savings in the long run. But if my calculations are right, my 36 month plan is saving $1700+ in interest charges alone in the long term, which I can't see the $9k earning even close to.

We both work for local government, which forces 10% of our earnings into the pot, with an additional 5% from them. We both also contribute into a deferred comp plan, but probably not enough at around $100 per pay.

 

Either method will work. Not worth a tussle imo. If your other debt had interest, different answer. But myself, with adequate emergency savings, the 9k pays off the cards and accelerates my debt free date.

 

I don't think it would come to blows haha... But I agree, had any other interest laden debts been involved, the numbers would have been reworked... Glad to see another with the same idea as myself however haha...

 

In most areas I let my wife do things her way, she is usually right & it's not worth arguing to end up doing it her way in the end.

 

haha I'm generally that way too... But this scenario has me wanting to play with fire apparently haha...

 

Good luck.

This comes to mind.

https://youtu.be/3Yl8Tc7UG2A

 

Don't "save" the 9k. It's worth drops daily with inflation. Invest or start paying stuff off.

 

I don't want you to think I'm telling you how to live your life or run your marriage. I'm not at all. That is is your life, you live it how you see fit.

That being said, I just want to clarify that as "head of the household" I didn't mean "breadwinner". I meant that you are the husband. The man. It is because of that, that your family looks to you for leadership and stability.

And I would also say that if you have left it to your wife to handle the finances, let her do it. Even if she doesn't make the decisions you would have made, you both agreed it is her responsibility.

Anyway, as i said, I don't know you or your wife of the dynamics of your marriage. I am just pointing out what I would do in your situation.

As far as the purely financial side of it, I am with you. I would pay off the credit cards. Then if possible, I would use the credit card to pay off as much of the debt that does have interest as I could, then do another "promotional" balance transfer to get back to that 0% interest.

For the past 15 years or so every big purchase I've made has been on a credit card. Then I balance transfer, get 0% for 12 months, and either pay it off in full within that time, or transfer it back to the first card for another 12 months of 0% interest. I haven't paid interest on anything except for my student loans and my Tundra, which were too much to put on my credit cards.

 

No worries, I appreciate the insight. I didn’t really have a say 15 years ago, she just kind of took on the responsibility, and I didn’t fight it haha…

We also make every purchase with a card to build points, and pay it off weekly… The 0% cards cover a bunch of dental work and furniture, both of which I lucked out on during promo times with good credit…

I also used to make my car note each month with a card to earn points, but the loan was bought out and the new lender doesn’t allow it… Bastards… haha

 

That's some BS right there. Maybe if your credit was shit I could understand, but if you are paying your bills on time there should be no reason you can't make payments with your credit cards.

 

This is great advice right here. Consider that mathematically paying off debt is equivalent to investing with the same rate of return (ie. pay off 10% debt has the same effect as investing in a mutual fund that returns 10%).

I assume the credit cards will have 18+% interest once the promotional period is over (average rate). There is no way you could ever get an 18% rate of return (guaranteed!) in the market. Pay this credit card debt off ASAP (even if it's still 0%) and make plans to pay the cards in full every month.

After the credit cards you may be better off investing than paying more than the minimum on your truck. If its 4% you can probably beat that in the market, 6% it gets a little harder.

Mathematically the "debt avalanche" is better than a "debt snowball". The reason people like debt snowball (paying off in order of smallest balances) is because of the psychological effect of crossing debts off. Mathematically you should always pay the highest interest rates off first. Pay all the minimum payments, then every extra dollar towards the one with highest interest rates.

I know people like to shit on it, but if you don't have a strong financial background Dave Ramsey's Audio Series "Total Money Makeover" is a good listen and very informative. It is not like the podcasts, he dives into some deeper stuff. I think almost anyone can benefit from it if they go into it with an open mind.

 

What about putting it towards the mortgage payoff? You’ll get it back when/if you sell down the road.

 

If he expects the market to go down within the next 6 months, then sure, pay off the debt and invest the extra cash he would have by paying off the debt. But if he expects the market to go up, then the $9,000 today will surely make more returns than say $500 a month for the next 6 months.

 

I got the truck for 2.54% through my local CU... I know literally nothing about stocks/investing, wouldn't even know where to begin...

As for the Ramsey stuff, I have seen and heard of it before, but haven't really given it a shot. I've always been a cheap ass so finding the info free was better than paying for it haha... But I will certainly look more into it...

 

I don't know jack about stocks and the like, other than from the "news"... Only thing I know is "buy low, sell high"...

 

usually they charge a 2-4% balance transfer fee. even with 0%, at some threshold, it is better to pay it off than to transfer it again with the transfer fee. that is assuming that you have the transfer fees of course. if not, then you are lucky

 

Essentially, the $9k should be used to pay off debt or invest as you stated you have an adequate safety cushion already. I expect some rocky financial times ahead for some, so plan ahead for that and don’t be “cash poor” and give up all your liquidity there if it’s needed.
The answer is keep paying all your debts off. Either with the $9k as a good starter, or with the biggest payments you can make. Smallest first to free up more payment money? Sure. Highest interest first to decrease total interest paid? Sure. It all pays off the debt. A lot of debt is psychologically crippling, that’s why the snowball works when paying the small ones off and having more money to pay the next one off. It’s like a diet. You need a plan you can stick with. Something that encourages you to continue and gives you results.

 

I don't think there's going to be a big difference either path you take just because these numbers aren't all that high and the time frame for any scenario isn't all that long (aside from the other comments of investing it and seeing a 10+yr return).

Personally, I'm STRONGLY debt adverse. If I was in your shoes, I'd use the $9k now to pay the cards/her car and roll those payments towards the truck. If your marriage dynamic is anything like mine, that $9k will start dwindling to the ether. Best to make a balloon payment while it's still intact.

 

Or.... you could ask her to meet you half way and put 4.5k against the loan and then you are there that much quicker, then throw the other 4.5k into a short term (6 months) CD as untouchable savings.

You are married. The options should always be more than all or none.

 

We both have a solid 20 +/- years until we can retire, so technically the money could be tied up for awhile… I just haven’t got a clue about that kind of stuff, so that’s why I immediately gravitate to the debt reduction option…

She was definitely more of a “see it, spend it” type, but over the last 15 years I’ve curbed that a good amount. But if we don’t move it (whether debt reduction or invest) I think eventually she would want to “use a little here and there”…

 

For the amount of money you'd lose over the 10 months it's almost a wash. I'd pay everything off like you're suggesting but it isn't going to bankrupt you if you don't.

I'll agree that there are potentially more benefits to investing it, but if you don't have one a financial advisor is a good thing to have even if nothing else than to bounce an idea off of.

I'll also agree that Dave Ramsey has good advice if you're cash poor and have interest ridden debt. However I don't agree with all of his views on debt, credit cards can be a good thing if used responsibly and no matter what anyone says it's much easier to get a mortgage with a good credit score.

He might have a heart attack if he found out what I pay for Amex annual fees

 

This is what I was talking about. "Financial Peace University". All over ebay for under $10 shipped. But I'm sure you could find a torrented copy out there too. I wouldn't bother with the podcast or other books.