Get Yourself Out Of Debt: Step 3: The Power Of The Snowball:
Hopefully you’ve been taking this seriously and by this stage you have a balanced monthly budget. This is the exciting part… now that we know how much we make and how much we spend, we can start figuring out how to plan our debt elimination. See told you this part was more fun.
Say Hello To The Debt Snowball!
Okay… so you’re wondering what the heck a debt snowball is aren’t you?
Imagine standing at the top of a snow covered hill. This hill is your mountain of debt. You can walk around the hill sprinkling more snow on it to cover your debts or you can make a snowball to wipe them all out. Imagine now making up a snowball at the top and rolling it down the hill… imagine how in the cartoons the snowball gets bigger and bigger and bigger every time it rolls around. This is the way a debt snowball works.
Applied properly it will drastically cut down your debt repayment and put you in the right direction… not to mention save you a ton of money on interest in the end. At first it seems like you aren’t doing much since the snowball starts off really small… this is where your patience, persistence and determination pay off. If you were to give up in the beginning it will have done nothing for you. It works kind of like compound interest… the longer you stay at it, the faster it works.
Here’s a breakdown of how the debt snowball works:
Say for example you have 2 credit cards, one with a 5k balance @ 12% ($100 min payment) and one with a 3k balance @19% ($100 min payment), plus a HELOC of 25k @5.5%(minimum $350 payment) and an old 8k student loan locked in at 6%($225 payment). Lets also say for example that your newly balanced budget shows you can put in an extra $50 each month towards debt repayment.
The best way to approach any situation is to pay off the highest interest balance first, then the next… etc. Some people like to pay off the smallest balance in the beginning just to get some momentum and satisfaction. I say whatever motivates you the most… do it. The snowball works by paying the minimum balance due each month on each account except for the one debt the snowball is working on (i.e. the highest APR).
So with our example numbers. Our total monthly minimum payments total $775/month plus we can use that extra $50. So we would pay the minimum payments on all of our accounts except the [email protected]% credit card. On that one we would pay $100 minimum plus $50 extra every month ($150/mo total) until paid off. Then we would apply that $150/ month extra to the [email protected]% credit card minimum payment of $100 ($250/mo total) until paid off. Then we would take that $250/mo extra and put it towards the [email protected]% student loan minimum payment of $225 ($475/mo total) until it is paid off. Then we would take that $475/mo extra and put it towards that HELOC minimum payment of $350/mo ($825/mo total) until it is paid off. At which point you are debt free.
See, that’s the power of the debt snowball… by focusing like a laser beam on one debt at a time… even though you can only spare an extra $20, $50… whatever dollars a month extra… it adds up… again… and again each time a debt is paid off. So, the hardest part is paying off that first loan since it takes the longest. After that you are gaining momentum and once you get 2 or 3 loans paid you are off to the races.
I mentioned in part 1 that we started with over 200k in debt. We had like 13 debts between medical, vehicles, home loans, credit cards… the whole bit. Now that we are more than 50% paid off, we have about $900 a month extra going towards principal on our current snowball debt. $900 a month extra takes your balances down really fast. But it wasn’t that way to start. Money was so tight when we finally decided to smarten up and start this process that we had a hard time finding an extra $2o a month. It seemed like forever, but finally we got that old private student loan paid off and started paying off the next loan, but then we had an extra $190 a month from having paid off the first loan.
Don’t just take my word for it either. Use that FREE debt snowball calculator linked below and see what I mean. For us 200k was going to put us debt free in 30 years if we paid things the way the banks wanted us to, and that’s just if we had stopped spending like we were. Instead we should be debt free within 5 years from the time we started out. It was originally going to be 7 years, but we added 2 extra part time incomes and frugal living to the mix to drop another 2 years off… but more on that later.
Want to see what I’m talking about and how the awesome power of the snowball will help you get out of debt? Here is a really good FREE debt snowball calculator. Just enter your debts and how much you have to spend in total with all your bills+any extra and it will show you how much you will save.
The key to the debt snowball is to keep it rolling. After you start to pay off a couple debts you may feel tempted to go and buy something again, but that is just going to put you back to square one. You need to stay focused and keep the momentum going forward.
Read on: Our get yourself out of debt series continues….
- Step 1: Get Yourself Out Of Debt – Make The Choice
- Step 2: Get Yourself Out Of Debt – Getting Started
- Step 3: Get Yourself Out Of Debt – The Power Of The Snowball (You are here)
- Step 4: Get Yourself Out Of Debt – Snowflakes From Frugal Living
- Step 5: Get Yourself Out Of Debt – The Motivation Problem
- Step 6: Get Yourself Out Of Debt – Life After Debt
*Note: This article is meant to be a general example of how one would get themselves out of debt and an explanation of how we are getting out of debt. I am not a certified financial planner nor am I a CPA, so this article should not be considered financial advice, but a general guide for inspiration.