The Power of the Snowball
Filed under: Credit Cards, Goals, Snowball
Update: I have posted a template for setting up your own snowball forecast.
Seeing the snow outside my window got me thinking about Dave Ramsey’s debt snowball concept. After all the reading I’ve done about snowballing one’s debt, I knew I was going to implement the same method in knocking out all of our non-mortgage debt. Until today, I really didn’t grasp the true power of the concept.
I decided, as I often do, to put together a spreadsheet so I could actually see the numbers and the impact they will have. But before I could input any numbers, I had to decide what my goals are. We had already decided to pay the car off first and completely pay it off when the balance reached $3,000. Since we’re getting reasonably close to that goal, I decided to leave that to be the first snowball “victim.” Second, we want to get our house’s loan-to-value down to 80%. At that level, the credit union will allow us to take control of our tax and insurance escrow and save or invest it as we like. After that, we need to just continue to pay down debt until it’s all gone.
Goals
- Pay off the car loan
- Get our loan-to-value down to 80%
- Pay off everything else
Once I had my goals lined out, then it was time to implement the spreadsheet with those goals. I gathered up all the information about my various interest rates and current monthly payments. Since I already use this data for putting together my Monthly Balance Sheets, this was easy to prepare. Since we currently didn’t have a “set” monthly payment for the student loans, I consulted with my wife and we decided that we would start putting $100 per month toward each instead of our previous “whatever we felt like” method. (I’ve found it’s really hard to build an accurate forecast around “whatever we feel like.”)
Then it came time for putting together the actual forecast - nothing more than the usual mundane data and repeating formulas. The actual inputting of the data may have been mundane, but the results were anything but! As I extended out the forecast through December 2013, it became clear that this was going to reveal extraordinary results… Since it’s really too large to include in the post, you can view the entire spreadsheet here: Snowball Forecast
Assuming no interest rate changes or new debt, here is what the forecast predicted:
Snowball Forecast
- Pay off the car loan
- Completed October 2008
- $300/month now goes toward Home Equity
- Get our loan-to-value down to 80%
- Reached May 2010
- $300/month now goes toward Student Loan 2
- Pay off everything else
- Pay off Student Loan 2
- Completed July 2011
- $400/month now goes toward Student Loan 1
- Pay off Student Loan 1
- Completed December 2012
- $500/month now goes toward Home Equity
- Pay off Home Equity
- Completed April 2013
- $715/month now goes towards savings and investments
That means in just a shade over 5 years, we will pay off $39,156.78 in debt! Come May 2013 we will have only the mortgage left with a balance of $148,045.06 and our home equity, assuming the value of our house stays the same, will be $57,954.94 - more than our total net worth today!
Until you see it for yourself, it’s really hard to imagine the power of the debt snowball. I had no idea it would be possible to be “debt-free” in just 5 years, seeing as how we have just over 13 years left on our home equity if we continue with our minimum monthly payments. It just goes to show the far reach of a simple philosophy change. If you haven’t already done so, take a read through M-Network’s break-down of Dave Ramsey’s 7 Baby Steps (Baby Step #2 is paying off debt with the debt snowball.)
Happy snowballing!
Many others have also discovered the power of the snowball:
- Get Rich Slowly - In Praise of the Debt Snowball
- I’ve Paid For This Twice Already - Baby Step 2: Pay Off Debt Using the Debt Snowball
- Consumerism Commentary - Paying Off Debt: 6 Steps to Building a Better Snowball
- No Credit Needed - Day 23 of 33 Days And 33 Ways To Save Money And Reduce Debt: Illustrated Debt Snowball
- Moolanomy - 7 Steps Debt Reduction Illustrated
March 12th, 2008 at 1:44 pm
Wow! This is a neat spreadsheet. How long did it take to enter in the formulas?
I’d be interested in making one of these for our debts….
March 12th, 2008 at 2:07 pm
Actually, it didn’t take long at all since I made use of Excel’s ability to copy formulas from cell to cell and auto-update the references. I might post the actual spreadsheet as an example in a later post. Thanks for asking!