OK, first of all, I should probably explain what a debt snowball is and how it works. They are fairly easy to set up and use, and they are very powerful. It’s even easier since I’ve found a great FREE resource that will help you create your own Debt Snowball.
What IS a Debt Snowball?
A little background on how a debt snowball works. It is a method to pay bills where you line up your credit card bills in a very strategic way. As you pay off one bill, you take the money you would have paid on that bill and use it to make extra payments on the next bill, and so on. It is widely acknowledged to be one of the best ways to quickly pay off large amounts of debt. Dave Ramsey swears by them. They are one of the big foundations of his debt program.
I’ve been using debt snowballs to pay off $30,000 worth of debt over the last decade. Now you’d think after all that time, I’d be completely debt free. But sadly, I’m missing one important element of the debt snowball. To be really successful at it, you have to cut up or close your credit card accounts and stop charging on them altogether.
Sadly, that’s my point of failure. Just about the time I start thinking I’m going to reach the finish line, we will have a series of emergencies, or a string of irresistible temptations. I end up putting new charges back on my cards and start the whole merry-go-round again. Oh well, sometimes it’s a matter of do as I SAY, not as I DO.
How to Use a Debt Snowball
So, in a nutshell, here is how you do the debt snowball. Let’s say these are your bills:
Bill A – I owe $2,500 and I pay $25/month at 5% interest
Bill B – I owe $4,000 and I pay $40/month at 8% interest
Bill C – I owe $6,000 and I pay $60/month at 9.5% interest
So, I’m going to pay just the minimum amounts on bills B and C, but I’m going to throw everything but the kitchen sink at Bill A. I will work extra hours, have garage sales, save money on groceries, whatever I can do to bring in extra money.
I manage to get Bill A paid off in record time – let’s say I pay an extra $175/month and pay it off in 12 months. So, then I take the $200 I’ve been paying on Bill A and I apply it to the $40 a month I am paying on Bill B. This gets Bill B paid off super quick and then I go after Bill C. Now I’m using the $200 from Bill A along with the $40 from Bill B to make mega-payments on Bill C. See how powerful this strategy can be?
A debt snowball not only gets the bills paid off in record time, it also saves a lot on interest rates. Then at the end, you’ve got a nice pile of extra cash available each month to save, invest, or spend on a nice vacation.
So, here is a link to the free resource I told you about. This is a FREE spreadsheet that will show you how to use your debt snowball FIVE different ways so you can see which is the fastest way to eliminate your debt. http://www.vertex42.com/Calculators/debt-reduction-calculator.html
Keep in mind that I am an Excel expert. No foolin’! I really am very sharp in Excel. I should be – I’ve been using it pretty much daily for about the last 35 years. (Which, if you know your spreadsheets, is PRIOR to when Excel was actually invented. I used several of its predecessors and I’ve even taught classes in it.) So if I say a spreadsheet is waaay better than anything I could ever come up with, believe me, that is a good spreadsheet!
You just download the spreadsheet – it seems quite safe. I’ve had no issues with viruses or anything from it. Then you just enter your bills. You don’t need account numbers, just the total amount due, the monthly payment amount, and interest rate. That’s often the scary part because you can see exactly how much you owe, all in one place. But that’s OK, it’s going to get much better very soon.
Debt Snowball Tips
There is another spot in the spreadsheet where you put in your extra income from any side work or extra savings. That is your snowball amount that gets applied to each bill in turn. Then you choose one of the 5 different snowball types. You can see the exact day when each bill will be paid off. It will also tell you exactly how much in interest you will be paying on it.
If you want to try a different method, simply click the calculation type and the numbers all update automatically. Try them all until you find the method with the fastest pay-off and the lowest interest amount. Eeeasy-peesy. On the 2nd tab, you can watch your accounts go down and down every single payday. It tells you exactly how much to pay on each bill every payday. Congratulations, you are on your way to snowball heaven!
Here’s another one of my best debt posts where I talk about the evils of minimum payments. I even give you my secret tip to pay off debt faster and avoid late fees – ever! The Trick to Minimum Payments.
Photo credit: Fiverr.com/WhitneyLayne