Snowballll Fiiiiight!

Honey, it's snowing outside!

In the spirit of snow, I thought I would write a post on snowballing. Ironically when I googled this, some really ridiculously nasty sexual practice came up...please note, I will not be discussing that type of snowballing in this post. I learned about this concept back in grad school. Snowballing is a popular method of paying down debt quickly and has been made popular by Dave Ramsey, a financial guru type fella with books and his own tv show. It's the concept of paying down debt by paying off the smallest debts first and eventually allowing your payments to snowball to become debt free.

Here's Dave explaining the Debt Snowball:


hahaha gotta love Dave's enthusiasm. So it works like this: (this is a simple example I got from wikipedia that does not take into accruing monthly interest)

A person has the following amounts of debt and additional funds available to pay debt (the debt is listed with the smallest balance first, as recommended by the method):
Credit Card A - $250 balance - $25/month minimum
Credit Card B - $500 balance - $26/month minimum
Car Payment - $2500 balance - $150/month minimum
Loan - $5000 balance - $200/month minimum
The person has an additional $100/month which can be devoted to repayment of debt.

Under the debt-snowball method, payments for the first two months would be made to debtors as follows:
Credit Card A - $125 ($25/month minimum + $100 additional available)
Credit Card B - $26/month minimum
Car Payment - $150/month minimum
Loan - $200/month minimum

After two months (presuming the person has not added to the balances, which would defeat the purpose of debt reduction), Credit Card A would have been paid in full, and the remaining balances as follows:
Credit Card B - $448
Car Payment - $2200
Loan - $4600

The person would then take the $125 previously used to pay off Credit Card A and apply it as additional payment to the Credit Card B balance, which would make payments for the next three months as follows:
Credit Card B - $151 ($26/month minimum + $125 additional available)
Car Payment - $150/month minimum
Loan - $200/month minimum

After three months Credit Card B would be paid in full (the final payment would be $146), and the remaining balances would be as follows:
Car Payment - $1750
Loan - $4000

The person would then take the $151 previously used to pay off Credit Card B and apply it as additional payment to the car loan balance, which would make payments as follows:
Car Payment - $301 ($150/month minimum + $151 additional available)
Loan - $200/month minimum

It would take six months to pay the car loan (the final payment being $240), whereupon the person would then make payments of $501/month toward the loan (which would have a $2800 balance) for six months (with the last payment at $234).

Thus in 17 months the person has repaid four loans, with two of them being paid in a mere five months and three within one year.

Now the point of snowballing is to pay debts off in the order of balances. There is also something called avalanche-ing which pays debts off in the order of interest. The differences between these two methods is that you pay more interest but pay debt off quicker with snowballing and you pay less interest and it takes slightly longer with avalanche-ing. Another reason snowballing is favored over avalanche-ing is because, mentally, you get a sense of encouragement from paying off debts every few months.

Linked here is a free spreadsheet that helps you keep track of your snowballing debt plan (complete with tabs and formulas already there). Click the download now button on the right.

This is REALLY useful if you're trying to get rid of multiple debts. Snowball away!