Our Snowball Plan (Out of Debt in 6 Years)

Get out of Debt on a low income

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On his site, Dave Ramsey talks a lot about using a snowball plan to get out of debt.  I’m not a huge Dave Ramsey fan, but there are some things about his recommendations that I can appreciate, and this is one of them.  Basically, you start off, chipping away at your smallest debt.  When that’s paid off, you take that payment and apply toward your next smallest debt.  You just keep combining all the payments, plus any extra, until everything is paid off and you’re out of debt.  In case  you’re still doubtful, I thought I would share the boring details of our plan, just so you can get an idea of how that might work.

It all started with an extra $50 a month, that we had from switching car insurance providers.  At that time, we also had $3,500 in our savings account that we’d put away from our income tax return, with the intention of applying it toward one of our debts.

Our Debts:

Student Loan #1, $8,000
Student Loan #2, $11,000
Mortgage, $59,000
Total Debt:  (approximately) $78,000

I was lying in bed one night, and it occurred to me that with the $3,500 we had put away for debt reduction, plus our regular payment ($100/month), and the extra payment ($50/month), we could finish off that debt with our tax return in Spring of 2013!  That was a very liberating thought to say the least, and it’s what inspired me to crunch the numbers to get a little more money freed up for debt reduction, and make the following plan.  In addition to the $190/month, we usually get around $5,000 in a tax refund (yes, we are those people who claim 0 dependents through the year, and basically “use our tax refund as a savings account” to get a large lump sum back.  It may not be advisable, but it works for us).  So, we can set aside $3,500-$4,000 from that to use for the purpose of debt reduction.

Student Loan #1: $8,000
May 2012: paid a lump sum of $3,500.  This not only reduced our principle, but because the interest accrues daily on the balance, it saves us $30/month in interest, so instead of $55 of our monthly payment going straight to interest, now only $25 of our monthly payment goes toward interest.  So, while we added $190/month to the payment through budget-crunching, we also added an extra $30/month toward principle through the savings in interest. New Balance: $4,500

June  2012-Feb 2013:  Pay $190+$100/month, with at least $260 coming straight off the principle (this number will slowly increase as the balance decreases). Projected Balance: $2,160
March 2013:  Pay $2,160 from our tax return to pay off this debt.

Student Loan #2, $11,000

March 2013:  Pay $1,800 from tax return.  New Balance: 9,200
March 2013-Feb 2014:  Pay $192 (reg. payment) + $290 (snowball payment from paid off Student Loan #1).  I’m not 100% sure about the monthly interest payment on this loan, but my calculations assume that $100 from the regular payment will be applied toward the principal, making the total monthly amount $390).  Projected Balance: $4,520
Feb 2014: Pay $4,000 from tax return.  Projected Balance: $520
March 2014: Pay $450 (since more will go toward principle) Projected Balance: $70
April 2014: Pay off Student Loan #2!

Mortgage: $58,000
(Approximate amount applied toward principle from monthly payments from June 2012-April 2014, $2,300.  Projected Balance: $55,700)

April 2014-Feb 2015: Pay $360 (monthly payment, not including taxes, interest, etc.)+$482 (snowball amount from previous loan payments).  I used the amortization schedule to estimate that $115 of my monthly payment will go toward principle, resulting in a total of $597/month going straight toward the principle. Projected Balance $49,133

Feb 2015: Pay $4,000 lump sum from tax return. Projected Balance $45,133
March 2015-Feb 2016: Pay $360 (monthly payment, not including taxes, interest, etc.)+ $70 (from PMI)+$482 (snowball amount from previous loan payments).  At this point, the PMI that we’ve been paying for $70/month will drop off, resulting in an additional $70/month to pay toward principle.  In addition to that, since the balance will be reduced, more of our regular monthly payment will go toward principle as well, approximately $164/month.  So, the monthly amount applied toward principle will be approximately $716). Projected Balance: $36,541
Feb 2016: pay $4,000 Projected Balance: $32,541

March 2016-Feb 2017:  Pay $360 (monthly payment, not including taxes, interest, etc.+ $70 (from PMI)+$482 (snowball amount from previous loan payments).  At this point, the amount from each regular payment going toward principle should increase to $217/month, resulting in a total of $769/month going straight toward the loan amount. Projected Balance: $23,313

Feb 2017:  Pay $4,000 Projected Balance $19,313

March 2017-Feb 2018: Pay $360 (monthly payment, not including taxes, interest, etc.+ $70 (from PMI)+$482 (snowball amount from previous loan payments).  At this point, $275/month of my regular payment should go toward principle, resulting in a total of $827/month going straight toward the loan amount.  Projected Balance: 9,389
Feb 2018: Pay $4,000 from tax return.  Projected Balance $5,389

March 2018-August 2018: Pay $360 (monthly payment, not including taxes, interest, etc.+ $70 (from PMI)+$482 (snowball amount from previous loan payments).  At this point, $330/month of my regular payment should go toward principle, resulting in a total of $882/month going straight toward the loan amount.

September 2018:  Pay off Final amount on mortgage to be debt free!!!!!!!!!!!!!!!!!!

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A few notes: 

-Yes, I know that life happens, and things could come up to interfere with our plan, which is why I said in my first post that we hoped to be debt free in 6-7 years instead of just 6 years.  Also, I left us about a $1,000 cushion from our yearly tax return, along with the money we try to keep in savings ($1,000) for incidentals.  This plan also doesn’t account for any extra money that I earn through article publications, etc.  Or extra money that my husband earns through occasional overtime pay and/or side jobs.  I purposely didn’t include anything like that because it’s not constant, and because I wanted to allow for some “incidentals.” 

And, this plan is pretty much dead in the water anyway, since we moved and everything is on hold as we try to sell our house instead.  However, I wanted to share in hopes that, in all it’s boringness, it might inspire someone else to see the numbers.

I know that 6-7 years isn’t terribly exciting, in comparison to those who pay off $85,000 in 6 months.  But, for us to be able to do this, even on a shoestring budget, is a terribly exciting thing, and 6-7 years is so much better than the 20 years we’d be looking at otherwise.

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