When I started this blog, my main goal was to hold myself accountable, especially regarding the erasure of the debt that had crept into my life. I thought the blog would keep me responsible as I shared my monthly updates on debt reduction. A few years later, the eradication of debt is no longer part of my life (thankfully). Nevertheless, I had an interesting conversation with a colleague and this made me go back to the idea of a snowball of debt as a way of paying off the debt.
Necessary steps before building your debt repayment plan
This may seem obvious to some, but you must follow three main steps. before to build your snowball of debt.
Calculating and recording basic information about your debt
You must know some basic information about your debt. You will need to know:
- The balance on each card / responsibility
- The interest rate on each card / responsibility
- Minimum payment on each card / responsibility
If I had to guess, most highly indebted people are adopting the ostrich by choosing not to know the necessary information. It is much easier to go through life without thinking of what could be an insurmountable sum that is aggravating. If you are thinking of creating a snowball plan on debt, you will need to know the starting point.
Stop the bleeding
It does not make any difference if you go to work to pay the debt if you still fill the boat with water. You have to make an effort to get positive cash flow.
Determine how much extra money you can invest to repay this debt
Finally, you should have a phone number written down how much extra money you can use to destroy your debt. Paying the minimum payments on all your debts (especially your credit cards) is a recipe for a personal finance disaster. For example, if you owe $ 5,000 on a credit card with an interest rate of 15% and a minimum payment of 4%, you will pay close to 50% of your original principal amount in debt and you will need more than 10 years to pay it back!
What is the method of debt repayment by snowball?
The Debt Snowball Method is to first pay off the smaller balance and then use the minimum payment associated with that debt to pay off the next card. So, by the time you pay the last card, you are using all the minimum payments from the previous debts, plus the extra money that you have set aside.
- Card A – minimum payment of € 2,000 from € 50
- Card B – minimum payment of 300 € of 12 €
- Card C – minimum payment of € 8,000 from € 320
- Card D – minimum payment of € 1,000 from € 40
- Extra money to launch the snowball – 100 €.
If you had to create a snowball in this example, you would pay card B with an additional $ 100; then, in 3 months, you will use the 100 € plus the 12 € of the minimum payment of the card B and you will refund the card D; you then take your card over € 112 with the € 40 D card for € 152 and you throw it to card A, then you finally start attacking card C.
What does the snowball method of debt do not do well?
You may have noticed that I did not include the interest rates above. The snowball of debt does not care about interest rates, she instead chose to focus on the psychological victories of paying off the card / debt faster. By the time I get to map D in the example above, I had the feeling of “winning” against the other 3 cards. The psychological advantage of paying a card could be at the expense of efficiency.
Create a debt snowball
Fortunately for me (and maybe for you), there was someone who had much better Excel skills than me and had already solved the problem. I have not opened one for years, but I was happy to see that the site I am mine was still available and that he was updating his spreadsheet. I used the Vertex42 Debt Snowball Spreadsheet when I needed it a few years ago and I recommend it. It’s free and very intuitive to use.