Credit card usage is amazingly prevalent in western society. The amount of transactions and debt held pursuant to those transactions is staggering and only seems to be growing. These posts have to do with either my credit card use, credit card bonus rewards or other’s credit card use and bonuses.
When I first started this blog, it’s main goal was to keep me accountable especially with regards to erasing the debt that had crept into my life. I felt the blog would keep me accountable while I shared my monthly updates of debt reduction. Fast forward a few years and debt eradication just isn’t a huge part of my life anymore (thankfully). Notwithstanding, I had an interesting conversation with a co-worker and it inspired me to revisit the idea of a debt snowball as a way to pay down debt.
Steps Needed Before You Build Your Debt Repayment Plan
This may seem obvious to some, but there are three main steps that you need to do prior to building your debt snowball.
Calculating and Recording Basic Information About Your Debt
You need to know some basic information about your debt. You’ll need to know:
- The balance on each card/liability
- The interest rate on each card/liability
- The minimum payment on each card/liability
If I had to guess most people with significant amount of debt take the ostrich approach choosing not to know the necessary information. It is much easier to go through life not thinking about what could be an insurmountable amount of money owed which is compounding. If you are going to build a debt snowball plan you are going to have to know the starting point.
Stop the Bleeding
It makes no difference if you are going to work to pay off the debt if you are still filling up the boat with water. You have to make an effort to get to cash flow positive.
Determine How Much Extra Money You Can Invest in Paying Down this Debt
Lastly, you should have a set number written down of how much extra money you can use to destroy your debt. Paying the minimum payments across the board on all of your debts (especially your credit cards) is a recipe for personal finance disaster. For example if you owe $5,000 on a credit card that has a 15% interest rate and a 4% minimum payment you will pay nearly 50% of that original principal in debt and it will take you over 10 years to pay off!
What is the Debt Snowball Method of Paying Off Debt?
The Debt Snowball method refers to paying off the smallest balance first and then using the minimum payment associated with that debt to pay off the next card. So by the time you are paying off the last card you are using all the minimum payments from the previous debts plus the extra money you set aside.
- Card A – $2,000 minimum payment of $50
- Card B – $300 minimum payment of $12
- Card C – $8,000 minimum payment of $320
- Card D – $1,000 minimum payment of $40
- Extra Money to get the snowball going – $100.
If you were to create a Snowball in this example you would pay off Card B with the extra $100; then in 3 months you are going to use the $100 PLUS the $12 from Card B’s minimum payment and pay off Card D; then you take your $112 PLUS Card D’s $40 for a total of $152 and you throw it at Card A, then lastly you start attacking Card C.
What Doesn’t the Debt Snowball Method do Well?
You may have noticed that I didn’t include the interest rates above. The debt snowball doesn’t care about the interest rates, choosing instead to focus on the psychological wins of paying off the card/debt quicker. By the time I get to Card D in the example above I have had the feeling of “winning” against the 3 other cards. The psychological benefit of paying off a card could be at the expense of efficiency.
Creating a Debt Snowball
Luckily for me (and possibly you) there was someone out there with much better excel skills than I that already undertook the problem. I haven’t opened one up in years but I was happy to see that the site I got mine from was still around and updating their spreadsheet. I used Vertex42’s Debt Snowball Spreadsheet when I needed it a few years back and would recommend it to you. It is free and very intuitive to use.