Don't tell me where your priorities are.

Show me where you spend your money and I'll tell you what they are.


-James W. Frick





Plan YOUR work! Work YOUR Plan!

Saturday, January 15, 2011

Snowball Method of Debt Repayment

I have mentioned the Snowball method of debt repayment a few times before; I have been meaning to go a little deeper in explaining the process. Well, now seems like a good time.

The Snowball method (as part of the “Baby Steps” to getting out of debt) has been made famous by Dave Ramsey in his book The Total Money Makeover The method involves listing your debts from lowest to highest (the most psychologically pleasing) or highest to lowest to determine which debt will get paid off first, then snowballing the payment money to the next debt.

Let’s look at this further:

• First build up your EF to $1,000 while paying the minimums on debt.
• Once you are ready to tackle you debt make a list and order them from smallest to largest.
• Start at the top and work your way to the bottom. Remember to pay the minimum on the rest of the debts while paying more than the minimum on the debt at the top of the list. Pay whatever extra that YOU are comfortable with.
• When you pay off one debt, snowball that money that was going towards the debt you were just focusing on to the next debt. Pay the minimum on the rest.
• Continue down your list until you are finished. It will take some time but you will be done before you know it.

Here’s how this would look (hope it’s not too confusing):

• Total Debt = $1,500

• CC#1 - $100 amount of debt - $5 minimum payment – [$5+$10 (extra monthly payment)] = $15 monthly payment
CC#2 - $200 - $10 = $10
CC#3 - $300 - $15 = $15
Loan #1 - $400 - $20 = $20
Loan #2 - $500 - $25 = $25

• CC#2 - $200 - $10 – [$10+$15 from previous month] = $25
CC#3 - $300 - $15 = $15
Loan #1 - $400 - $20 = $20
Loan #2 - $500 - $25 = $25

• CC#3 - $300 - $15 – [$15+25] = $40
Loan #1 - $400 - $20 = $20
Loan #2 - $500 - $25 = $25

• Loan #1 - $400 - $20 – [$20+$40] = $60
Loan #2 - $500 - $25 = $25

• Loan #2 - $500 - $25 = [$25+$40] = $85

You are already use to spending the repayment money each month so you won’t miss it as you move onto the next debt. As you are working your way through your list, this is where the EF comes in handy, while paying off your debts the EF allows you to not go further in debt. Be prepared because this can be a long journey but I have read about people paying off thousands in the span of a couple years, so it can be done!

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