Paying off Debt using Debt Snowball Method

[sherker55]

Credit to Dave Ramsey, I attended a free course of his (except for materials)

its a simple concept, put your debts in order of smallest to greatest...pay only minimum payments to all the ones except the one with lowest balance...this one, pay as much as you can...scape every last cent to pay this one of...after that one is paid off, you then take whatever you were applying to the one you paid off, and add it to the next smallest, and so on.  the little ones get paid off fast cause they are small, and once you have two or three of them paid off, you have a larger chunk of money that you have freed up monthly to be able to apply to the remaining debts. there is nothing to buy, no gimics to look out for, just an idea...and it works.

i.e. say you figure you have 7 debts: sears card, Home depot card, 2 credit cards, a student loan, and 2 car loans.

Sears: $250 with $25 minimum
HD: $400 with $30 min
Credit 1: $500 with $35
Credit 2: $750 with $50
Student: $5000 with $150
Car 1:  $9000 with $300
Car2: $13,000 with $425
Total debt: $28,900 Total Min Monthly Payments:  $1015  

Say you actuall put out $1150 total to all.

Most people ony pay the minimum to small debts and pay larger payment chuncks (more than minimum) to big debt in hopes to pay them off.  problem is the small ones are still there and never get paid off because of making minimum payments.

Now, so lets say you have $1150 that you are spending monthly on $1015 of debt, difference is $135.  So now you pay Sears the minimum plus the $135 extra that you were paying out to other debts, which gives you $160. So $250-$160=$90.

Next month you owe Sears $90, you have $160 just like the month before, but now you only owe $90, so you pay it off, and you are done with it (should also cut it up at this time!) but then there is still $70 left over..so it goes to home depot...$400 - last month $30-this month $30 -$70 left over from sears payments=$270...

now your are in month 3 Sears is gone, HD is $270.  You have $160 that you were paying to sears + $30 minimum for HD=$190.  HD is now $80.  

Month 4: Sear is gone, HD is gone (paid off and cut up) AND you have $110 left over to apply to the next one, credit card 1: which is $500...but you have made 3 min monthly payments of $35 x 3=$105...so its is really $395 but then you still have $110 left over from pay off HD & Sears and you are at $285.  So $285 minus month four Min of $35...$285-$35=$250

Month 5: Sears, HD are gone...Credit 1 is now only $250.  now your montly payment ball is: $225 (Sears=$160 HD=$30 Credit 1=$35)...Credit 1 has $25 balance

Month 6: Sears, HD, and Credit one are paid off, and you have $200 left from this months snowball.  Credit 2 was $750 with $50 min which you have been paying...so 6 months @ $50= $300 minus $200 left from snowball, and now Credit 2 has a $100 balance...

Month 7: Sears, HD, Credit 1, and Credit 2 are paid off.  you have $175 left from snowball (Sears=$160 HD=$30 Credit 1=$35 Credit 2=$50)-100 left from Credit 2 balance=$175)   Next one is a big jump, student loan $5000 at $150 a month.  so $150x7 months=$1050 plus remaining $175 from snowball=$1225.  $5000 balance-$1225=$3775 new balance

Month 8:  Monthly snow ball ammount is now: (Sears $160, HD $30, Credit 1 $35, Credit 2 $50, and Student Loan $150) = $425 it takes another 9 months to pay off the student loan, at $425 a month

Month 17:  Sears, HD, Credit 1, Credit 2 and Student Loan are Paid off.  Your next debt is Car 1: $9000 with $300 min.  But you have paid that down over the last 17 months so the loan is now only $3900!  Your debt snow ball is now  $725 ($425 + $300).  So now your Car 1 payments are $725 a month.   In 5 more months Car 1 is paid off

Month 22:  Sears, HD, Credit 1, Credit 2, Student Loan, and Car 1 are Paid off.  Your next debt is Car 2: $13,000 with $425 min.  But you have been paying that over the last 22 months, so now IT is only $3650!!!  Your debt snow ball is now $1150 ($725 + $425) .  So now your Car 2 payments are $1150 a month.  In 3 months Car 2 is paid off!

So in just about 2 years, you are debt free....this of course is just an example, I made up the numbers

Just for shits and giggles, lets add in a mortgage ( a bit more complicated becuse of the time interest):  $200,000 with $1500 monthly payments for 30 years would to $540,000 over those 30 years ($1500 a month x 12 months) x 30 years=540,000

mortgages are mainly all interest in the beginning, with very little of the payment going towards principal...and towards the end, very LITTLE interest and mostly principal.   the trick is to pay down the principal so there is less interest that can be charged.

so for 2 years we are paying the 1500 a month=$72,000 which is mainly interest, but still $540,000 - $72000 = $468,000 balance in principal and interst.
Using the money from the debt snowball $1150 and adding that to the $1500 per month = $2650 a month payment towards the mortgage.  So $468,000 / $31,800 = 14 years, so it has cut the loan in half.  Actually it would end up being more like 5 years; becuase of the shorter time period, you will end up paying less money for interest and more towards the principal.  Soooo say that of the regular $1500 a month, $750 goes to interest and $750 goes to principal...its not 50/50 but for the sake of arguement well just do this.  You are $1150 a month from the debt snowball directly to principal, as well as $750 of monthly mortgage payment=$1900 x 12 months=$22,800 a year towards the principal loan ammount of $200,000

[CrackerTeg]

Good info Mark. Makes total sense to do it this way. I tried this method briefly but couldn't stick to it since shit always comes up.

[Mike]

5000 for student loans? Boy I wish!

[sherker55]

Good info Mark. Makes total sense to do it this way. I tried this method briefly but couldn't stick to it since shit always comes up.

you need to establish and "emergeny" fund, usually $1000 is what is recommended, that way you don't have to revert back to debt...the use of this money is for true emergencies...and to make sure you don't use it on random shit, pretend like it is there for your childrens life, and their lifes are at stake.

5000 for student loans? Boy I wish!

Yeah me too...that's acutally about what I have left though

[timot_one]

Seems like basic common sense for those of us that are fiscally irresponsible.  Student loans are my biggest debt, which is why the school I went to was the biggest mistake.  I don't have any credit cards or any other debt because I don't want to accrue any more debt.

[v6sicksspeed]

you need to establish and "emergeny" fund, usually $1000 is what is recommended, that way you don't have to revert back to debt...the use of this money is for true emergencies...and to make sure you don't use it on random shit, pretend like it is there for your childrens life, and their lifes are at stake.

Yeah me too...that's acutally about what I have left though

actually an emergency fund should be approx 6 months of salary - definitely takes time to obtain but should be built as a reserve.

[Tunergirl]

5000 for student loans? Boy I wish!

I can relate. I am almost maxed on mine for life......

[Mike]

Mine have come way down the last three years I've managed to pay off about 40k. Trying to get most of it knocked out before buying a house this year.

[sherker55]

you need to establish and "emergeny" fund, usually $1000 is what is recommended, that way you don't have to revert back to debt...the use of this money is for true emergencies...and to make sure you don't use it on random shit, pretend like it is there for your childrens life, and their lifes are at stake.

Yeah me too...that's acutally about what I have left though

actually an emergency fund should be approx 6 months of salary - definitely takes time to obtain but should be built as a reserve.

true but 6 months takes alot of time like you said, so it is important to have something, and that's why saving up $1000 asap is recommended (alot of emergencies fall within that $4 ammount)...the next step would be three months, then 6 months

[sherker55]

5000 for student loans? Boy I wish!

I can relate. I am almost maxed on mine for life......

that's why you start small and pay off the smalll debts first to get them out of the way (and don't build back up) then you throw everything you can come up with every month to pay down the bigger ones.  the course I took, they recommended selling everything you can that you don't use on a regular basis, and also applying that money to your loans as well.  also, cutting out all the little purchases through out the week, like convienient stores...packing lunch instead of going out, etc.

I think the point being that if you stop spending, you can finish paying off what you have.

[N4TECguy]

That's a good theory, but what are the chances that if you built up all this debt, that you're not going to continuously accrue new debt while you're paying off the old ones?

[CrackerTeg]

That's where will power comes in. It's possible you accrue more debt but it's also possible you land a bad ass job with a hefty paycheck as well. Everything is full of what ifs and we can what if it to death but it has worked for me in the past when I stuck to it.

[Mike]

5000 for student loans? Boy I wish!

I can relate. I am almost maxed on mine for life......

that's why you start small and pay off the smalll debts first to get them out of the way (and don't build back up) then you throw everything you can come up with every month to pay down the bigger ones.  the course I took, they recommended selling everything you can that you don't use on a regular basis, and also applying that money to your loans as well.  also, cutting out all the little purchases through out the week, like convienient stores...packing lunch instead of going out, etc.

I think the point being that if you stop spending, you can finish paying off what you have.

A lot of this seems like common sense to me but, it's impractical for most people. Packing a lunch and not stopping at a store is impractical for most of us. I wish I had the time to pack a lunch! Of course it would save me some money but, it's just not realistic.

[CrackerTeg]

True but there's other ways to cut back. That's just one thing that can be done.

[timot_one]

There's a lot of ways that I've cut back on my spending over the years.  I bring lunch with me to work 95% of the time, I brew coffee at home, and I rarely go out to dinner.  I agree with Mike though.  A lot of this is common sense, and some of it is impractical depending on lifestyle and living situations.  It's all about changing how you do things.