When I ran the reader-survey, most of you stated that you wanted to learn more about my debt-repayment process. It’s been awhile since I’ve posted about it. I guess the excitement of paying off my car was still pretty high so I wasn’t as focused on my credit card plan. I have also ended up charging some recent events onto my card, so even though my balance wasn’t increasing, it also wasn’t plummeting in that really fun snowball way. So it seemed like a good time to refocus and give you guys an update!
Before I get to that, I wanted to talk to you guys about the method I use: The Snowball Method. I’ve been using it for so long now that I take for granted that everyone knows what it means. I got this question from Polly and wanted to share my answer, just in case anyone else had the same question. Next week, I intend to have a more detailed explanation of my remaining debt payoff plan and a printable for all of you to download.
Can you tell me what you mean when you use the term snowball effect? I want to put myself on a tight budget and lower my student loans. Can you tell me how you put together a budget? I need help. I love following along with your stories on your blog.
Any help would be greatly appreciated.
Here’s my reply:
Thanks for your great question! You’ve inspired me to write a post explaining what I mean by snowball method! It is a method that apparently has been around for awhile, but gained popularity when Dave Ramsey really started promoting it. You can read all about it on his website here.
Basically, you first take all of your bills and create a list. Subtract that list from how much money you take home each month after taxes. Then create a budget (it’s not as scary as it sounds!) that shows how much you expect to spend on gas, health care, clothes, etc. From there, you’ll see how much “extra” you have each month.
Then, on another piece of paper, list your debt in order of lowest balance to highest balance. This might feel scary, but it will be OK! Find out what the minimum payment is for each one, and plan to pay that in your monthly budget. However, on the lowest balance you’ll also include the “extra.” Even if it’s only like $25, it helps! Keep paying that extra on the lowest balance until it’s paid off.
Then, when debt #1 is paid off, you take what you were paying on debt #1 (minimum + extra) and ADD IT TO debt #2’s minimum payment. So now you’re paying debt #1 minimum + debt #2 minimum + the “extra.” It starts to add up like a snowball. For example, my credit card number 1 minimum was $40, then #2 was $70, while my “extra” was $300. When I paid off card #2, my “snowball” became $410. Then when I paid off my car (a very hefty payment), it became $925. So I take my $925 and apply that to my credit card #3 along with that minimum payment ($40) and make that payment. Although, now I put $100 into savings, but that’s not the true snowball method way to do things. I just thought it made more sense.
When I pay off my last credit card, ALL of that money will go to my smallest student loan, which already has a minimum payment of $115. So I will add that to the snowball and keep going. That means my snowball will be $965 (snowball + minimum) + the $115 minimum payment. By that time, my smallest student loan could be paid off in less than 1 year. I can’t even imagine what that will feel like!
What the snowball method really does is keeps you from feeling like you got a “raise” when you pay off debt. There’s still debt to pay off so that money, which you’re not used to having, immediately gets a greater purpose. I know when I was younger, if I paid off a debt I thought, “Yay! Forty more dollars to spend on something fun!” But in reality, there is a much bigger purpose for that money.
There is another method for debt repayment called the Avalanche method. That format orders your debt payment by highest interest rate. This isn’t a bad idea, but it does not come with the instant gratification of paying off a credit card or other loan really soon after starting. If you’re someone who reacts more positively to instant results than scary math, the Snowball method is probably right for you.
Does that all make sense?? I’ll also work on a budgeting post in the future. That’s a much bigger question. :) For now, I’d super recommend you peruse Dave Ramsey’s site. He has some good printables on there. There are also a couple money related podcasts I listen to that keep me motivated to pay off debt and sacrifice now for the great sense of payoff in the future, those are Listen Money Matters and Her Money Matters.
I also recommend downloading the Mint app. That’s how I keep track of all of my accounts and remind myself that I don’t always have money for fun, because my net worth is like negative 100,000 something due to those awful student loans! Seeing the big picture has been a good motivation for me.
I’d love to hear how your debt repayment goes!
Do you use the Snowball or Avalanche method? I’d love to hear your experience in the comments too!
Do you have questions about my debt repayment plan, or any of my other posts? Click “Contact Me” above and send me an email through that form! Or you can message wheremysoulbelongs at gmail dot com! Maybe your question will get featured in a blog post!