DebtReductionBlog.com

So, have you heard about the debt snowball?  It’s not a bad thing, it’s a good thing.  Let’s say you are just about as buried as you can be in debt but you have just enough breathing room that you can squeeze in an extra $100 a month.

Now, let’s say you have 7 payments a month listed here (we’re going to use some numbers that are somewhat in line with what I have seen lately. (Lately happens to be around April or May of 2008)):

1. Mortgage – $2,188 a month carrying a balance of $328,234 (6.75% interest)
2. Home Equity Line of Credit (HELOC) – $796 a month with a balance of 77,303 (12% interest)
3. Car loan – $422 a month with a balance of $16,883 (10% interest)
4. Student loans – $275 a month with balance of $9,930 (8% interest)
5. Wells Fargo VISA – $51 a month with a balance of $2,654 (18% interest)
6. Discover – $37 a month with a balance of $1,823 (19% interest)
7. Capital One – $11 a month with balance of $377 (22% interest)
   

So, you’re now obligated to pay $3,780 a month just to your debt.  Since you’re a two income family, you bring in $4,944 a month after taxes, (good job).  You have a baby so after food, diapers, formula, insurance, doctors visits and cable you have about a hundred bucks left over to do whatever you want to do.  That hundred dollars use to not be enough so you would go out and buy a on credit, right?  tisk tisk…I’m kidding; I’ve done the same thing which is partly why I know all this stuff now…but I digress.

The good news is that you have finally decided o buckle down and get yourself out of debt regardless of how long it takes!  Since you work nights and your spouse works days, you don’t need to pay for babysitting or other forms of baby watching.  That’s good.  (is the picture clear?  I want it to be clear…pictures are worth a lot of words but since I don’t have any pictures I guess I’ll just have to keep describing)

Anyway, so…you’ve got the extra hundred bucks so you decide it’s going toward bills.  (very nice)  But which bills do you pay?  Do you spread it out evenly?  Do you pay down the highest interest first?  Just how do you decide to distribute that extra money?

Well, in this situation, I highly recommend the Snowball Method.  I don’t know who invented the Snowball Method of Debt Reduction but they were smart.  I guess I can only assume was named after the creator of the method, James Edward Snowball of Rockville, Maryland.  (ok, maybe not)  It doesn’t really matter.  Here’s what you’ve decided to do, (funny how I know these things, huh?).

You’re going to take the smallest debt on your list…

7.  Capital One – $11 a month with balance of $377

…and pay the minimum of $11 plus the extra $100.

Ok, so now you’re paying $123 on the Capital One card the first month of your program and all the others remain the same.  You’ll keep paying $123 towards the Capital One card until it’s finally paid off.  Here comes a tricky part…After your 3rd payment, you will only owe about $60 on the card.  So, you take the $111 and split it amongst two payments.  First is the Capitol One which is $60.05 and the balance of $50.95 extra goes to the second card, (the Discover).

So, after month 4 your lowest balance debt is paid off and you’re working on your second highest balance.

To recap, you paid off your lowest balance card in 4 months as opposed to the 55 months it would have taken you if you just paid the minimum every month.

Now, you take that $111 you were paying on the Capital One and put it all towards paying off your Discover Card.  So now you’re paying $111 + $37 = $148 per month towards your Discover Card.

Ok, get comfortable because it’s going to take you an additional 14 months to pay off the Discover.  Of course, that’s a far cry better than the 97 months it would have taken you if you only paid the minimum of $37 each month.

Next we want to take out the Wells Fargo VISA.  If we played by the banks rules, our debt to them would take 102 months to pay off.  But, since we’re reducing debt at a much faster pace than ever before, our Wells Fargo VISA gets taken out just 31 months into the program, (just 13 months after we finished the Discover).

Wow!  Things are starting to speed up; I’d better buckle my seat belt…

Student Loans are next and they don’t give up much of a fight.  We pay off that debt just 6 months later.  Guess what?  You have NO MORE UNSECURED DEBT!  Oh, happy day!  Go out and splurge.  Buy yourself something nice…like a bag of chips, (you still have a lot of work to do).

At this point our snowball has been rolling along and picking up extra money each and every time we pay off another debt, and another, and another…

So now our snowball is $474 PLUS our car payment now of $422 for a total of $896.  So now we’re going to pay $896 a month on the car until it’s paid off which only takes about 7 months after we paid off the Student Loans.

We can unbuckle the seatbelt and relax a bit now because it’s a little longer to our next destination, (which is the HELOC payoff).

Let’s recap…
So far we have paid off $31,667 in just 43 months.  It seems like a long time; but when you consider you would have been paying on those credit cards for more than 100 months, it’s less than half, (I figured that out without a calculator, by the way). 

So moving on…

If we played their game the way they want us too, we wouldn’t pay off that HELOC for 357 months.  BUT, since we have a snowball, we’re going to apply it just after we finish with the Car loan and we are going to get rid of that Equity Line of Credit in just 60 months after we finish paying off the car.  That’s 103 months into the program and we’ve already paid off the second on the house and we have NO UNSECURED DEBT!  That’s a great feeling.

Our snowball is now $1,692.  We are going to add that to our monthly mortgage payment and send the bank $3880 for the next 93 months.   Congratulations, now you are completely out of debt AND you have an extra $3,880 in your pocket every month.

1. Mortgage – $0 a month carrying a balance of $0
   
2. Home Equity Line of Credit (HELOC) – $0 a month with a balance of $0
   
3. Car loan – $0 a month with a balance of $0
   
4. Student loans – $0 a month with balance of $0
   
5. Wells Fargo VISA – $0 a month with a balance of $0
   
6. Discover – $0 a month with a balance of $0
   
7. Capital One – $0 a month with balance of $0

Feel free to buy a new car now since your old rust-bucket is over 17 years old now. 

Ok, the above example is just an idea of what is possible.  Obviously life circumstances change and hopefully for the better.  You are not always going to make $5,000 a month on two incomes.  If I had to hazard a guess, I would say 10 years from now $5,000 a month will be pretty low for a 2 income family.  BUT, you control your debt every step of the way.  You never have to increase your debt if you don’t want to.  Remember, it is your choice to be debt free or you can stay in debt and hope everything works out for the best.

Let me know if I can help!

Best regards,

Dave B