The Debt Snowball Saved my Marriage: Spreadsheet Tell-all

Debt Snowball

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For those buried under an avalanche of credit card, car, and personal debt you’ll never find anything as useful as the Debt Snowball or it’s many variants.  So grab a handful and start rolling your own, snowball that is, and take advantage of the power of focus and small wins.  FiscalGeek speaks from experience, currently my wife and I are gaining steam with our own debt snowball, we have 3 items left my Truck, a Visa Card and my wife’s car.  You can track our progress on the lower right sidebar here, I’m using the Google Chart API to graph every step of our journey down the mountain.

And no our marriage was not in jeopardy but it’s in a considerable better state as it relates to money because of the conversations that we have several times a month focused on our financial future.

This article was featured in the Carnival of Personal Finance #212 be sure to drop by and check out all the excellent articles.

A Word about Debt Consolidation

Even if you’ve never heard of the debt snowball there is no avoiding the late night cable ads for debt consolidation or constant radio bombardment advertising a no pain way to take care of your ever increasing credit card payments and lump them into one manageable payment.   I implore you to consider your other options before you shell out even more money to do something you can manage yourself. There is hope if you are struggling to even make your basic payments and put food on the table you should get some practical help.  I can’t even begin to claim detailed experience negotiating with Credit Card collectors or negotiating settlements for your credit card debt, I would wholeheartedly recommend Dave Ramsey’s website for more information.  He has a fantastic course called Financial Peace University that can give you a great set of tools for getting your finances in order and techniques for dealing with creditors and debt in general.  But read on and we’ll explore real ways to get yourself out of the hole your in and win with your money.

Debt Consolidation Doesn’t Address the Issue

Let’s face it the real reason that you would need some form of debt consolidation service would be because you’ve put yourself in a financial situation that mushroomed to the point where you could no longer sustain because you overspent.  It could have happened for any number of reasonable reasons, medical issues, family situations, addictions or the need to have stuff which I suffer from.  It’s okay, let the guilt go, but now’s the time to do something about it and address where the change needs to come from, you.  Without a change in your behavior all the head knowledge you can amass won’t do you a bit of good.  That being said let’s get on to some tools to help roll your way out of your situation but understand borrowing more money to get yourself out of debt only gives you that much more rope to hang yourself with.

Debt Snowball the Basics

A debt snowball is simple.  You take all of your outstanding debts: credit cards, personal lines of credit, bank loans, student loans, car loans, 2nd mortgages, home equity lines of credit, overdraft credit lines (yes that’s debt too) and order them from the smallest amount owed to the largest amount owed.  Let’s do that with some not so theoretical  debt.

Debt Debt Balance Minimum Payment
Credit Union Visa Card $992.04 $45
Mells Bargo Overdraft Credit Line $1234.48 $12
NiftyBank MasterCard $6693.58 $144
Credit Union Truck Loan $10139.17 $529
Credit Union #2 Visa Card $11505.17 $230
Machovia Car Loan $32971.21 $565
Totals $63535.65 $1525

Okay we’ve got our debts lined up here from smallest outstanding balance to the largest outstanding balance. The power of the debt snowball is the incremental successes as well as the power of applying payments from previous debts to add to the amount of money you are snowballing on your next debt in line.

Before you get too carried away with your debt snowball my sincere hope is that you are operating on a budget or a spending plan so that you can readily identify how much money you are going to allocate to getting out of debt. If you need some assistance getting started you can check out my Zero Based Budget Overview a 3 part series to help you get on track.

What’s really happening here? Let’s say you’ve gone through your budget and you’ve decided that if you really bust it you can apply $2200 to your debt payments every month. That means the portion that you additionally snowball is that that amount minus your minimum payment total which is $1525. So you’ll have $675 extra right now to apply to your first debt the Credit Union Visa Card. Once you’ve paid that off in the next 2 months you’ll take whatever is left and apply that to the Mells Bargo credit line.   So you would have the $675 plus the $45 of minimum payment you were making to the Credit Union. As you get going your snowball gets bigger and bigger because you can apply the other debt payments to the next in line and now you are really cooking.

What about Interest?

This is what often raises the ire of personal finance people the world over. Just because you’ve listed your debts smallest to largest in no way does that represent the highest to lowest interest rates. But wait you say “Why would I pay more interest than I have to?”  The answer is simple, you can build some great success early on by tackling the smallest debts first. If you make a small win, it only encourages you to work header to get the next one and the next one and so on. If you started with your highest interest rate first and say it was the Credit Union #2 Visa Card in our example above it’s going to take you close to a year at your current rate to just pay that one off. A lot can happen in a year, it’s easy to get discouraged. In the end the money you pay on interest isn’t going to vary that much besides think of how much interest you are saving by using the debt snowball rather than paying the minimum payments for the rest of your life. If you want to see the differences it’s easy to model if you use the spreadsheet tools below.

Debt Snowball Variants

It’s ultimately up to you how you want to stack your debts and pay them off, like I have stated the debt snowball is great for seeing rewards much quicker, if you have debts that are close to the same balance and one has a much bigger interest rate by all means order that one ahead, or if like me you have one debt that just gnaws at you for whatever reason throw that one up there. We had one like that and since I was getting a sizable tax return I applied it all to that one even though it was technically 3rd on the list just to get it off there, and I felt so much better about it. You can model the debt snowball or the custom order or highest interest rate first all in the spreadsheet program it’s very simple once you’ve set it up.

Debt Snowball Sheet

Debt Snowball Sheet

Debt Snowball Spreadsheet

I am a huge fan of Vertex42 a site dedicated to all things spreadsheets, almost all of them free. An amazingly helpful template they provide is the Debt Reduction Snowball Calculator which we’ll go through here. It works in Microsoft Excel or Open Office so you’ve got options. There are two sheets the first is great for just playing around the second is where you want to do your work and create a plan that you can then print out. We’ll enter our numbers from our table above so you can see what it looks like. Just transfer your Creditor names in column B the outstanding balances in column C, the interest rate in column d, and your minimum payment in column e. If you want to try out different ordering you can put your own numbers next to the debt in the custom column and in the dropdown for Strategy you can choose custom to see what that looks like.

Put your own numbers in there and try the different strategies to see what a difference it makes for your payoff dates, and the amount of interest you’ll pay. In our scenario the Debt Snowball versus the Avalanche results in all debts being paid of in March of 2012. You pay an additional $290.02 to go the debt snowball method but the power of success is worth much more than that small amount considering our total is $63,535.65 of debt. The cool part is that you can keep tweaking the numbers around easily enough to see how it changes your payoff date. The monthly payment cell is where you see what adding an additional hundred dollars here or there makes on your overall plan.

Debt Snowball Payment Schedule

Debt Snowball Payment Schedule

Advanced Calculations

Now if you click on the 2nd tab for the spreadsheet called Payment Schedule you can get a detailed list of when things will be payed off and how much each month is directed at that debt. If you know that you’ll have some kind of windfall money, tax return, inheritance, bonus or something of that nature you can enter that into the Snowball column on the month that you expect it to see how that changes things. Print this out and now you have an action plan to dig your way out.

All That’s Left is You

Now the only thing stopping you from getting out of debt is you. Millions of people have used these methods to get themselves out of mountains of debt and with some diligence, hard work and perseverance that could be you.

This article is part of the FiscalGeek Cornerstone Series that lays out some key tenants of personal finance, the very building blocks of winning with money. Please come back and we’ll explore many other aspects of personal finance. You might want to subscribe to the RSS Feed or subscribe to the Email-List for updates as they come available. Thanks for reading and good luck!

Photo courtesy redjar at Flickr.com

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{ 9 comments… read them below or add one }

JoeTaxpayer 2009/07/02 at 2:01 pm

I saw the spreadsheet has a choice of methods, and just wonder how much more you’d save by paying high rate first. Other than that question, good post, I wish you well.
.-= JoeTaxpayer´s last blog ..College Financial Aid =-.

Reply

Joe 2009/07/08 at 1:13 am

“…take advantage of the power of focus and small wins…”

- well said. You’ve got to start somewhere if ou want to solve debt problems.
.-= Joe´s last blog ..Car Loans for People with Low Credit Scores =-.

Reply

Gholmes 2009/09/02 at 3:45 pm

Debt snowball works. Nice layout of the different spreadsheets.

Reply

WR 2010/04/30 at 8:36 pm

I love it!

This is precisely the mentality one must have when tackling their debts. Small successes inspire repeat behavior. Behavior repeated becomes habit. It is the rituals we establish that make us wealthy.

I get some of the same feedback with the strategy I espouse, namely funding your contingency fund, paying off debt and giving to charity all at the same time. The most common is the one you cite, “It’s all about the interest rates”.

It isn’t. It’s all about getting small successes under your belt and establishing the habits that will pull you out of debt and propel you to financial independence.

-WR

Reply

BJ 2010/06/14 at 4:02 pm

Hey Paul…I have a couple of credit cards that have two interest rates (Purchases & Transfers). How do I incorporate that into this spreadsheet? Thanks in advance!

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Alfredo Etnies 2010/07/05 at 4:50 pm

I really feel that tenants nowadays get the worst deal in lots of areas. As an example, insurance for tenants costs so much extra. All the laws are in favour of those who have bought their property. Apart from they don’t actually own it, because the mortgage company really does. Therefore why should “owners” receive a better deal for services.

Reply

Mike Carson 2010/07/21 at 6:34 am

It’s so important to get a handle on debt. If you are looking for professional help, I recommend http://www.debtguru.com. They offer great consolidation credit counseling that will help you get out of debt for good.

Reply

Tom B 2011/10/14 at 9:30 am

getting out of debt is probably the most important thing you can !! ! Don’t let the big bank win is right!

Reply

Paul Van Lierop 2009/07/02 at 2:28 pm

In my particular case by doing the custom debt snowball with citibank being first it was a $160 difference between the two methods so I am blasting that out as is, my wife just loves to hear we knocked another one out and gives her a little more motivation. I am fully committed myself at this point so if were to just be me my geek nature would tell me to pay less interest. It’s working well for us though.

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