Debt Snowball

So, you decided to fight your way out of the debt mountain. Congratulations, you have
Debt snowball

So, you decided to fight your way out of the debt mountain. Congratulations, you have taken a step in the right direction. There are actually two ways to payoff debt. They are the Debt Snowball or the Debt Avalanche. It is up to you to choose which one you want to implement. The main thing is to select one and get started. First, we will look at the Debt Snowball.

DEBT SNOWBALL

When you use the Debt Snowball, you list all of your debt starting with the lowest balance of each debt and proceed down to the highest balance. For example, let’s say you have five debts: debt one is a Visa with a $500 balance, debt two is a Sears with a balance of $250, debt three is a car loan with a balance of $13,000, debt four is a MasterCard with a balance of $1,000, and debt 5 is a Discover with a balance of $650. You would list your debts from smallest to largest:

  1. Sears      $250
  2. Visa        $500
  3. Discover $650
  4. MC         $1,000
  5. Car         $13,000

Your next step is start paying the most that you can on the Sears balance and pay the minimum balance on the remaining four debts. Let’s say you have $650 allocated for debt repayment. The minimum payment on each of your debts is:

  1. Sears      $5.63
  2. Visa        $10
  3. Discover $17.88
  4. MC         $20
  5. Car         $383

The table below shows the $650 distributed across each debt. The Sears debt will be paid off next month, while the Visa will be paid in four months. As you can see, as each debt gets paid off the amount from the debt that is paid off is added to the next debt with the lowest balance. By the eleventh month, all of the $650 is going to your car loan!

Sears
219.12
VISA
10.00
Discover
17.88
MasterCard
20.00
Car
383.00
35.15 193.97 17.88 20.00 383.00
                     –  229.12 17.88 20.00 383.00
                     –  87.83 159.17 20.00 383.00
                     –                       –  247.00 20.00 383.00
                     –                       –  236.28 30.72 383.00
                     –                       –                       –  267.00 383.00
                     –                       –                       –  267.00 383.00
                     –                       –                       –  267.00 383.00
                     –                       –                       –  206.63 443.37
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  650.00
                     –                       –                       –                       –  167.17

The biggest advantage to the Debt Snowball is that you see small debt disappearing. This gives you hope and a sense of victory. The biggest drawback is that the small debt might not be the debt with the highest interest rate. This means you’ll be paying more money in interest on the debt. 

In the Downloads page, is a Debt Reduction Calculator from Vertex42. You can download the spreadsheet and you can test which method makes for you, Snowball or Avalanche. The spreadsheet includes both. 

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