Day 23 of 33 Days And 33 Ways To Save Money And Reduce Debt: Illustrated Debt Snowball
Made popular by Dave Ramsey, the Debt Snowball allows for rapid debt reduction.
I used the Debt Snowball and managed to pay off $11,500 in 10 months.
Here’s a quick overview of how the Debt Snowball works:
- List all debts – either from lowest balance to highest balance OR highest interest rate to lowest interest rate – and make minimum payments to all accounts.
- Make an extra payment to the first account on your list.
- After paying off the first account, take the combined amount (minimum payment and extra payment) which had been going to the first account, and apply it to the second account.
- Repeat until all of your accounts have been paid off in full.
The following charts illustrate the power of the Debt Snowball.
Note: I have listed accounts ‘lowest balance to highest balance’ – but you might choose to list them ‘highest rate to lowest rate’. Pick the method that suits your personality.
Chart 1: The Setup
- Accounts have been listed by their balances – lowest to highest
- Monthly Interest is an approximation – annual rate divided by 12
- Extra payment amount is $300
- M – Month
Chart 2: After Six Months
- Account #1 has been paid off
- (Blue Arrow) Amount not needed for Account #1 is added to Extra Payment
- (Red Arrow) New Extra Payment amount = Account #1 Minimum + Original Extra Payment
Chart 3: After 10 Months
- Accounts #1 and #2 have been paid off.
- (Blue Arrow) Amount not needed for Account #2 is added to Extra Payment
- (Red Arrow) New Extra Payment Amount = Account #1 Minimum + Account #2 Minimum + Original Extra Payment
Chart 4: After 14 Months
- Accounts #1, #2, and #3 have been paid off.
- (Blue Arrow) Amount not needed for Account #3 is added to Extra Payment
- (Red Arrow) New Extra Payment Amount = Account #1 Minimum + Account #2 Minimum + Account #3 Minimum + Original Extra Payment
Chart 5: Complete Chart
As you can see, by focusing on one account at a time and then ‘snowballing’ your payments, debt reduction occurs rapidly. In effect, instead of four separate ‘debts’, all accounts are treated like one ‘big debt’.
Leave a comment if you’ve used the Debt Snowball method to get out of debt.