Frugal For Life

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Living with debt is like living in hell. You have the horned devils that want their payments, the heat is on to pay on time, every month, and not forget one and, on the chance that you do forget, the little devils go after you with their collection agency pitchforks to poke while you try your hardest to get out of that hell!

As odd as it sounds the easiest way to get out of hell is with a snowball. This is the new meaning to your snowball’s chance in hell to get out from under the poking, prodding and heat of debt to something better and much more to your liking.

To snowball your debt reduction is to break down the big mass amount of debt into something that is more manageable, something that can be held in your hand, like a snowball. It is a small packed snowball that allows you to roll it into a larger snowball of payments.

Here is how it works

debt 1 — 500.00 — 18% interest — 15.00 minimum payment
debt 2 — 1000.00 — 30% interest — 30.00 minimum payment
debt 3 — 5200.00 — 12% interest — 155.00 minimum payment

Every month you pay 200.00 to your 3 debts. To snowball a payments means you continue to pay the minimum on all  three debts, but then you chose one of the debts to apply the extra $25 a month that you found by cutting back somewhere else.

There are two ways to snowball, you can either pay off the smaller debt first and get that out of the way and work toward the bigger ones or pay off the higher interest rate first and save money on interest paid.
For instance if I pay only minimums on each of these:

Debt 1 will take almost 4 years to pay off
Debt 2 will take a good 6 years
Debt 3 will take about 3 1/2 years.

However, if I apply the extra $25 I found to one of them:

Debt 1 will take 2 years to pay it off saving me 140.00 in interest
Debt 2 will take 2.1 years to pay off and save me 826.00 in interest
Debt 3 will take almost 3 years to pay off and save me 198.00 in interest.

Overall, I can take that one extra payment of $25 and apply to one of them, still paying the minimum on the others, and get them paid off in 6 months - 4 years early. Now once I get one paid off, this is where the snowballing takes effect.

Let’s say I paid off debt 1, the 500.00 one, that means I can now move the 25.00 payment to my next choice, but I also carry along the minimum payment I made on debt 1 - so I end up paying 40.00 to either of the other debts. The cool thing about it is that while I was applying that 25.00 to debt 1, I was still paying down the others, now when I apply 40.00 to either debt 2 or debt 3, not only is the amount I am putting into it every month higher, but I am also paying on a debt that is lower.

For instance: Debt 1 is now paid off, I have $40 to apply now to debt 2 (1000.00) but since two years has passed that debt is now lower, let’s say it’s about 655 dollars. That would mean that I would pay my usual minimum of 30.00 still plus, I would add my new 40.00 (15.00 from debt 1 that is paid off and 25.00 from the money I ‘found’)- ultimately, I get this bill paid off in 11 months more. That is two debts down and one to go!!

The final debt would get the initial 25.00 +15.00 (min. from debt 1)+30.00 (min from debt 2) =70.00 extra going to the final debt and presumably that would help to remove that debt in a matter of months as well.

When you look back over this, your budget has stayed the same, you are always paying some debt with your minimums, even though those debts are technically gone. But it allows you to get what few debts you have left paid off sooner.

And with that little snowball you have just rolled your way right out of the hell that you were in and have learned a valuable lesson - to never go back to that place again!!

These calculations were used with the help of the ‘debt investment calculator‘

comic via