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  1. #1

    Using a Debt Snowball Plan - Does it Really Work?

    If you’re hearing the term “debt snowball” for the first time, you’re probably wondering how a debt snowball works and why the debt snowball plan is an effective method of paying down debt.

    How Does the Debt Snowball Plan Work?

    Popularized by author and financial radio talk show host, Dave Ramsey, the debt snowball plan teaches individuals to pay off their debts systematically, using basic math and motivational theory. To begin a debt snowball, order your debts from smallest to largest. The debt with the smallest balance should be paid first. Extra money in your budget should be applied directly to the smallest debt. The minimum payments should be paid on all remaining debts.



    Once the smallest debt is paid in full, you'll begin paying on the next smallest debt. But instead of continuing to pay the minimum balance, apply the previous sum of money (the money you’d been paying on the first debt) towards the principle balance on the next smallest debt. This is where the “snowball” begins picking up momentum. As you pay off each loan, the minimum payment on the prior debt rolls into the payment on the next highest debt.

    Example of the Debt Snowball Plan:

    John has the following debts:


    • Credit Card - $500 balance - $26/month minimum payment
    • Student Loan - $7500 balance - $250/month minimum payment
    • Car Loan - $10,000 balance - $450/month minimum payment
    • John works a part-time job and makes an additional $150/month that can be used for debt repayment.

    Step 1

    • For three months John would pay his debts as follows:
    • Credit Card - $500 balance - $176/month ($26 minimum payment PLUS $150 extra)
    • Student Loan - $7500 balance - $250/month-minimum payment only
    • Car Loan - $10,000 balance - $450/month-minimum payment only
    • After 3 months the $500 balance on the credit card would be paid in full and John would begin paying on the next largest debt, the student loan.

    Step 2

    • For sixteen months John would pay his debts as follows:
    • Student Loan - $6750 balance (You’ll notice the balance is lower-remember John had been paying the minimum payments for 3 months while he was paying off his credit card debt)
    • He’ll now be paying $426/month on the student loan ($250 minimum payment PLUS the $176 he’d previously been paying towards the credit card debt)
    • Car Loan - $8650 balance - $450/month minimum payment
    • After 16 months the remaining $6750 balance on the student loan would be paid in full and John would begin paying on his last debt, the car loan.

    Step 3

    • For approximately a month and a half John would pay his car loan as follows:
    • Car Loan - $1450 balance (John paid the $450 minimum payment for 16 months while he was paying off his student loan debt)
    • Now John will pay the $450/month minimum payment PLUS $426/month John had been using to pay his student loan.
    • After 1.5 months the remaining balance on the car loan would be paid in full and John would be completely debt free!

    From start to finish John will have paid off $18,000 in debt in less than 21 months using the debt snowball plan.

    Does the Snowball Plan Work?


    If you’re dedicated to the plan, have the money to pay your minimum payments each month, and follow the steps; the snowball plan is a tried and true debt reduction strategy.

    The theory behind the debt snowball plan is simple: positive reinforcement. As you pay off small debts you feel a sense of pride and accomplishment. Watching your debt total decrease motivates you to continue paying off your debts and working towards complete debt freedom.

    Special Considerations

    • The above example doesn’t account for interest or additional borrowing. If John were to being borrowing on his credit card again, his balance would increase and it would obviously take him longer to pay off his debt.
    • it’s very important that you continue paying the minimum balances on each of your larger debts while you pay off the smaller debts. If you stop paying the minimum payments on your larger debts, you risk damaging your credit and/or going into default.

  2. Using a Debt Snowball Plan - Does it Really Work?
  3. #2
    Registered User Junior Member
    Posts
    25
    It is a good plan. Some people might think it's counter intuitive to let a balance at 8% sit longer than a balance at 4% simply because the 4% is a smaller balance and this plan say the 4% gets paid first, but this is all about psychology. A former coworker of mine also owns a local pizza place, and when my wife found out she was pregnant, I told my coworker the next day walking into work and said "You know how I've talked about being a delivery driver and maybe working for you?" I started working 3 nights a week, and I made it a point to tell her, the manager, and a couple of coworkers there, every time I got a CC to zero. When you start deleting CC's out of a spreadsheet, or erasing or crossing them off your paper list, it's VERY rewarding.

    Also, part of the psychology is that when you've paid off the smaller balances and are staring down a $25k student loan, you know it'll take longer to pay off. When you snow-ball that money over and over, that money is already gone from your budget, so it won't feel like you're sacraficing anything additional to put extra payments towards such a huge debt.

    The only thing concerning the interest rates is, once you've committed to paying your debt off and you won't ever use your card again (this is actually Baby Step 2 of the plan, Baby Step 1 of Dave's plan is $1,000 emergency fund, so you no longer need to use a CC for emergencies), you could look at finding a good card with a 0% balance transfer offer so take care of a much higher rate card with a larget balance (like a poor fellow in another thread who has a 24.99% card). But if you go that route, you have to make sure that you've kicked your spending habit and won't start charging on any card again.

  4. #3
    Quote Originally Posted by Frov View Post
    When you start deleting CC's out of a spreadsheet, or erasing or crossing them off your paper list, it's VERY rewarding.
    So rewarding! I did a variation on the snowball when I was paying down my debt (I did the highest interest loan first because that's what made sense to me). Checking those debts off my list felt great. The psychology behind the snowball is really motivating.

  5. #4
    Registered User New Member
    Posts
    8
    I can attest to the snowball method as well. It may have cost me more in interest but I felt like I was actually making progress every month and that was motivation to pay off more than the minimum payment or even what I planned on paying.

  6. #5
    Quote Originally Posted by DebtSmash View Post
    I can attest to the snowball method as well. It may have cost me more in interest but I felt like I was actually making progress every month and that was motivation to pay off more than the minimum payment or even what I planned on paying.
    As long as you're seeing the progress and are keeping the motivation high, the interest is really a moot point at some level. If you pay off the debt as fast as possible (in my case student loans) you may actually end up saving in interest. I know I did because I paid off all the loans in 2 years instead of 10.

  7. #6
    Registered User New Member
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    United States
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    How I got some great free debt advice..

    I just wanted to talk to a professional about my issues before I made any decisions. National debt relief answered all of my questions and gave me some really good adive. They tried to sell me on some of thier programs naturally, but I got a lot out of the phone call. Heres the number.. 855-531-0255 if anyone wants to give it a go.

  8. #7
    Registered User Senior Member
    Posts
    115
    Sounds like a very good plan and seems like it will work for just about everybody. I wonder if there is an investment snowball plan?

  9. #8
    Registered User Senior Member
    Posts
    192
    Quote Originally Posted by fixmyscore View Post
    Sounds like a very good plan and seems like it will work for just about everybody. I wonder if there is an investment snowball plan?
    Here is step 4 in his plan. I think it will cover what you want to know.

  10. #9
    Registered User Semi Pro Member
    Posts
    301
    I used to read reports about more and more Americans have gotten themselves out of serious debt since 2009 but now there was a study performed in March 2015 that there was a surge in the average household credit card balance to nearly $7,200. This is not far from what experts consider unsustainable, the $8,300 level.

  11. #10
    Registered User Senior Member
    Posts
    192
    Quote Originally Posted by Dan B View Post
    I used to read reports about more and more Americans have gotten themselves out of serious debt since 2009 but now there was a study performed in March 2015 that there was a surge in the average household credit card balance to nearly $7,200. This is not far from what experts consider unsustainable, the $8,300 level.
    Don't be too quick to believe that. With the constant increase in ID theft, more people are being advised to use their credit cards because of zero liability versus a debit card. So, although you may see more personal debt, some of it is attributable to balance transfers and payment preference than simply increasing their debts.

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