## Monday, October 16, 2006

### Debt Reduction via Snowball

I was going to title this post "Snowballin'," but I have a bad feeling that might be a term for some kind of sex act. (If you find out, don't tell me. If I wanted to know I could google it myself.)
Anyway, the "snowball" method of debt reduction generally means paying all your minimum payments and then sending any extra money to one particular debt. Once that one is paid off, you'll have even more extra money to send to the next priority.

Generally, people either advocate paying off your high-interest debts first (thus paying the least amount of money overall) or paying off your smallest balances first (thus keeping yourself motivated because your number of debts shrinks faster).

Recently I've been looking at this handy snowball calculator, which lets you calculate your debt schedule either way. You can do this yourself with Excel, but it takes a while, and this little website is pretty nifty and quick. Plus it makes a nice compact spreadsheet for you.

I put in my existing debts, and the amount I have available every month. In the past, I've based this monthly number on my budget, but this time, I looked at the past 5 months and took an average of what I've actually paid to my debts each month. (I didn't go before that because I got a raise and some other financial details changed.) So I think that's the most realistic number I can have. It does not take into account any bonuses or other additional money I might get - I'm actually expecting \$3000 in grant money this year, plus probably a Christmas bonus at work.

It's good that this schedule isn't too optimistic, because according to the calculator, it'll take me 32 months to pay off my debts. That's too slow! I really want to be out of debt when I graduate in May of 2008. So I hope I can speed it up.

Anyway, according to this, it will take me 32 months to pay off my debts regardless of whether I do smallest-first or least-interest first. Doing smallest-first will cost me an additional \$252 in interest over the entire 32 months. It allows me to pay off my first four debts in 2/07, 5/07, 12/07, and 10/08 rather than in 2/07, 10/07, 8/08, and 6/09, so it should be more psychologically satisfying. I estimate that the greater motivation of paying off more debts more quickly is worth the \$252 (not that I'd pay \$252 for the satisfaction; more that I think I'll send in more than enough extra to compensate as a result of the additional motivation).

Anyway, without further ado, here is the full chart. I hope to reference this later with good news about how I'm doing in relation to what it says here. Hopefully this will expand if you click on it.