Growing up in Seattle, WA, you would think I would be used to this white stuff people up north call snow...I am not. 2 years in CA, 11 years in GA, and 4 years of college in SC made me a wimp when it comes to cold weather!
We just had our first snow of the year last week- BEFORE THANKSGIVING!! Oh boy, I am not sure I am ready for this! Don't get me wrong, it is beautiful! It just piles up, stays too long, and causes all sorts of driving troubles! But, welcome Mr. Snow, please enjoy your stay this winter!
As I thought about snow- snowmen, snowball fights, shoveling snow- I began thinking about our own DEBT snowball. No, I did not cleverly coin this term, but it fits well into this time of year! The debt snowball is actually used by many financial gurus and you know what's crazy?? It actually works!!
One way to make a great snowball is to make a small snowball and just start rolling it. As you roll it, it gathers more and more snow becoming bigger and bigger. And, if you were to roll that small snowball down a big hill of snow, it would collect snow and gain speed as it continued collecting snow! The debt snowball works the same way!
List your debts by amount of debt smallest to largest (don't worry about the interest rate right now). Start off by working to pay off the smallest debt first. Once that first debt is gone, you now have a little bit more to put towards principal and will then pay off the second debt a little bit faster. Then, that debt will be gone, you will have more to put towards principal and so forth.
Doesn't make sense? Okay, let's break it down. You have a $6000 car loan, a $500 credit card bill, and $10,000 in student debt. Your minimum payment for the car is $300 a month, the credit card $25 a month, and the student debt $175 a month. Your initial reaction might be to pay off the student loans with a higher interest rate first, but look at how big that loan is? You would spend months on it and get nowhere fast, then get discouraged and eventually, give up.
However, let's see what happens when we start with the smallest one first- the credit card. You pay your minimum payments totaling $500. You find at the end of the month you have $500 left over- pay it on the credit card. Now, the credit card bill is gone and you have an extra $25 a month that was going to the minimum payment on the credit card. Next, the car loan. Pay your monthly payment of $475 (student debt and car loan) and put an extra payment of $525 towards the car. You should get the car paid off in about 7 1/2 months instead of the next 1 1/2 years!! In less than a year, you now only have your student debt and an extra $325 plus the $500 you started with to pay on the principal. So, you pay the minimum payment of $175 and put $825 toward the principal! With that extra $825 now built into your debt snowball, you are traveling fast toward being debt free! Once you are paying on the principal of the student debt, the minimum payment goes away (as long as the $10,000 is one loan) and you now have $1000 to put towards principal each month! You see where I am headed??? In 10 months, that student debt can be gone!! In 1 and 1/2 years, you could be debt free and the owner of your car instead of the years and years that it would have taken you if you had just made minimum payments!!
This scenario can change slightly based on interest rates and the way your loans are split, but the method always works! It SUBTRACTS years off your debt repayment and ADDS years to what you can save for your future! Remember, this is simple math!
When Dave and I were married, we had a total of $60,000.00 worth of debt- one car loan and 10 students loans. We began working on our debt snowball the first month we were married and now, 14 months later, we only have 3 student loans left to go!!
As much as I complain about the snow, it is beautiful. The world turns into a winter wonderland and for a brief moment in time, life slows down just a little bit. Children laugh and play, adults enjoy time with their kids, and all the flaws of the earth are covered by this beautiful white blanket called snow. Snow is an amazing reminder of the greatest debt repayment ever made- the death of Christ on the cross to pay for my sins so that I could be washed white as snow. So, let it snow, let it snow, let it SNOW!
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