How to Make Your Snowballs Work in Overdrive

March 19th, 2008

Filed under: Snowball

This is a follow-up to yesterday’s post announcing availability of the first version of my snowball forecast spreadsheet.

By now you’ve had time to play with the forecast for snowballing away your debt and things may be looking pretty sunny or very dim depending on your situation. That’s ok, because getting out of debt is a very personal experience and can be a painful one. But the pain of eliminating debt is far less than the long-term damage debt can do.

That’s where your snowball forecast comes in. With any new venture, it is necessary to go into it with a solid plan in place. Your forecast is your plan to eliminate your debt in the most efficient way possible. My forecast came out to be a 5-year plan but yours may be shorter or much longer. But the important thing is that you have a plan, regardless of how bleak it may appear right now.

The real kicker to getting out of debt is to ignore the minimum payments (in a good way). When you built your forecast, you likely inputted the minimum monthly payments for each of your debts. Instead of focusing on the minimums of each debt, you need to determine what is the most you can afford to put into paying your debts every month. Ideally, your maximum is well above the sum of your minimum payments (if not, please seek help consolidating debts into monthly payments you can afford and stop adding on more debt) and the difference between those values is a bonus snowball.

For example, the sum of my minimum payments (excluding the tax and insurance for my mortgage) was $1,698.26 per month. After analyzing our income and expenses, we might determine that we can actually afford $1,900. That means from the very start, I could add a $201.74 snowball to my first debt. (Notice I did not say I could afford to take on that much more debt - the goal here is to get out of debt, not buy more stuff.)

Suddenly, by adding $200 extra (to keep number even) to the first debt and keeping that around as a snowball, I eliminated 18 months from my snowball forecast. $200 per month saved me a year and a half of debt payments! And even if we could only afford $50 more (less than the cost of an average cable bill), we would still shave off 5 months of debt.

As you can see, the true power in snowballing comes not from the minimum-payment snowball itself, but from the extra you commit to paying off your debt. Think of it as each extra payment as a boost of nitro to really power your snowball down that hill. Keep up those extra payments and even let them grow (through salary increases and snowflakes) and you’ll blow through that debt in no time!