How to Make a Debt Snowball

So you want to pay down your debts.  How are you going to do that efficiently?  Use the Debt Snowball.  Just like a cartoon snowball rolling down a slope, the debt snowball builds momentum as it goes.  You’ll need to get a list together of your debts (your most recent statements will do.) You’ll want the debt name, balance, minimum payment, and rate of interest. Next, you want to make a list. It might look something like this:

List of Debts
Name of Debt Balance Rate Minimum Payment
Student Loan 1 $15,000 6.5% $110/mo.
Student Loan 2 $1,000 7.5% $55/mo.
Car Loan $9,000 13% $305/mo.
Bank Card 1 $2,500 18.5% $50/mo.
Bank Card 2 $1,000 21% $20/mo.
Store Card $300 22.5% $15/mo.
Gas Card $150 22.5% $20/mo.

Next, you’ll want to figure up the subtotals and decide how much extra you can put toward debt pay-down, if at all.

List of Debts
Name of Debt Balance Rate Minimum Payment
Student Loan 1 $15,000 6.5% $110/mo.
Student Loan 2 $1,000 7.5% $55/mo.
Car Loan $9,000 13% $305/mo.
Bank Card 1 $2,500 18.5% $50/mo.
Bank Card 2 $1,000 21% $20/mo.
Store Card $300 22.5% $15/mo.
Gas Card $150 22.5% $20/mo.
Subtotals $28,950 $575/mo.
Extra For Payments $130/mo.
Total Payment $705/mo.

Alright, now which debt should get the extra payment? There are three methods. I’m going to go with the lowest cost choice by ranking my debts in order of interest rate.

List of Debts
Name of Debt Balance Rate Minimum Payment
Gas Card $150 22.5% $20/mo.
Store Card $300 22.5% $15/mo.
Bank Card 2 $1,000 21% $20/mo.
Bank Card 1 $2,500 18.5% $50/mo.
Car Loan $9,000 13% $305/mo.
Student Loan 2 $1,000 7.5% $55/mo.
Student Loan 1 $15,000 6.5% $110/mo.
Subtotals $28,950 $575/mo.
Extra For Payments $130/mo.
Total Payment $705/mo.

Ooh, we have two debts with the same interest rate. Which should I put in front, the lower balance or the lower minimum payment. In this case, I choose the lower balance.  My reasoning is that, since the balances are small, they will be paid off more quickly, so the minimum payment doesn’t really matter.  If the balances were pretty large, and nearly equal, then I would pay off the one with the largest minimum payment.  That way it reduces total minimum payments if your debt snowball is interrupted by job loss.

So, here’s how this all goes down.  You tack the extra money for payments on to the minimum payment for your first debt, like so:

List of Debts
Name of Debt Balance Rate Minimum Payment
Gas Card $150 22.5% $150/mo.
Store Card $300 22.5% $15/mo.
Bank Card 2 $1,000 21% $20/mo.
Bank Card 1 $2,500 18.5% $50/mo.
Car Loan $9,000 13% $305/mo.
Student Loan 2 $1,000 7.5% $55/mo.
Student Loan 1 $15,000 6.5% $110/mo.
Total Payment $705/mo.

Boom. With your first payment you’ve eradicated your first debt. Good for you! Here’s what you do next: you add the extra money for payments, plus the minimum payment for the previous debt to the minimum payment for the next debt on the list.

List of Debts
Name of Debt Balance Rate Minimum Payment
Gas Card
Store Card $300 22.5% $165/mo.
Bank Card 2 $1,000 21% $20/mo.
Bank Card 1 $2,500 18.5% $50/mo.
Car Loan $9,000 13% $305/mo.
Student Loan 2 $1,000 7.5% $55/mo.
Student Loan 1 $15,000 6.5% $110/mo.
Total Payment $705/mo.

Once this is paid off, the money rolls over to the next loan.

List of Debts
Name of Debt Balance Rate Minimum Payment
Gas Card
Store Card
Bank Card 2 $1,000 21% $185/mo.
Bank Card 1 $2,500 18.5% $50/mo.
Car Loan $9,000 13% $305/mo.
Student Loan 2 $1,000 7.5% $55/mo.
Student Loan 1 $15,000 6.5% $110/mo.
Total Payment $705/mo.

Here’s what it looks like on the last loan:

List of Debts
Name of Debt Balance Rate Minimum Payment
Gas Card
Store Card
Bank Card 2
Bank Card 1
Car Loan
Student Loan 2
Student Loan 1 $15,000 6.5% $705/mo.
Total Payment $705/mo.

And that’s how you pay your debt off quickly with the Debt Snowball.

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