09Aug

Our Snowball Plan (Out of Debt in 6 Years)

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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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Comments

  1. Sounds like a plan; LOL :-)

    Our plan is similar – with man it is impossibe … but with God ALL things are possible.

    ~Val

    • Thanks for the encouragement, Val! I pray that God blesses you and your husband as you strive to honor Him in your finances as well!

  2. I just want you to know that I dont think your post is boring. I enjoy them because they are realistic. Hubby and I are so trying to get out of debt. We have ALOT of desicions to make but we are chipping away.

  3. That sounds like a fabulous plan! My husband introduced me to the Dave Ramsey show a few years ago and we went hardcore! We’re now out of debt and on baby step #4.

    You can do it! Stay dedicated!!

    • That’s awesome :) There’s only so much we can do with our very limited income, but we’re excited to see light at the end of the tunnel anyway.

  4. We used the snowball method at the beginning of our marriage to pay of student loans. Becoming debt free was a wonderful feeling. Hope you are able to stay on track and reach your goals! :)

    • Thank you, Jenni! We are excited to feel encouraged about it and can’t wait to see what God is going to do along the way :)

  5. We have student loans and a mortgage. I would LOVE to get the student loans paid off. We did really well at the beginning of our marriage, but now it seems like we always find something else to do with our money. I’m conflicted between enjoying life now because we aren’t promised tomorrow and stretching the money for a few years to get debt free.

    Its good to see the numbers played out. Makes me think it’s possible for us to do it even with just a little extra.

    • Mary Beth, I’ve always had the same struggle of “enjoying life now,” but that’s one of the reasons that I want to get it paid off. I feel like so many people these days die in major debt, because they are always upsizing and charging, and never pay it off. To me, that’s equatable to stealing. Debt is an obligation, and we want to pay it off sooner rather than later.

      But, I do struggle sometimes as well, and think it would be nice to just spend that extra money on something :) I pray that God will guide you in your decision, and bless you in your quest to pay off debt, even with just a little extra here and there.

  6. We’ve been working on our debt for years. It seems to be a never ending mountain climb! I know we’ve made some progress but it’s really not much when you look at the big picture. I’m grateful that we have at least gotten to the point where we pay cash for our regular expenses and no longer “need” to use credit.

    I wish you the best of luck, I think this was a well written post and I will be returning :)

    New follower from Thoughtful Thursday!
    -Desiree’
    Life with our Family

  7. Hey Crystal! Go you!! We are working the Dave Ramsey plan. We have paid off 52 thousand dollars in six years. That was a bit longer than planned, but we were not fully on board quite then. And in that time we had two babies, I went from working full time to a stay at home mom, buying two cars cash and we bought two rental properties putting cash of ten percent down with closing costs. That was a little backwards with the whole getting out of debt plan. So now we are slowly chugging away at paying all the mortgages down. We have no debt but house debt, but that house debt is a little over $ 260,000. And that is making about 65,000 a year. Eek!! So I’m a bit jealous at how small your
    mortgage debt is. You may not make a ton, but with how frugal and motivated you are. I know youll get there. Plus, you have motivated me. I told you about how we cut down on bills. We also re did our bidget, started an envelope system so we don’t overspend and I’m learning how to make homemade pizza crust, pie crust, your yummy cheese muffins, bread, rolls, homemade spaghetti sauce and canning this and peaches. Things I never did a year before. We started an organic garden, bought chickens and built a coop. There is still plenty more we can cut back on I’m sure-like groceries. You guys are amazing!!! I love reading your posts, they’re so motivating!! Keep writing! Sorry for this book I wrote. :-/

  8. I’m a new reader – just found you through Peaceful Mom and I love your blog!
    Snowball – That is exciting – just to know that you can do it. I think you have to put it down on paper and crunch all the numbers if you really want to get there. We just became debt free this month but it has been a long road and we were definitely not as focused as we should have been. So, I encourage you to stay the course even when things pop up and you will also be happily surprised when some things go faster than you imagined.

    I can relate to the moving expenses – we just moved out of state in July and I can’t believe how expensive it was to rent a truck and all of the misc items that add up so quickly!

    Groceries – I am amazed at your $200/month grocery budget. You may have posts on this that I haven’t found yet but I would love to see more about how you do this. I struggle with trying to stick to $100/week for a family of 5.

    It is interesting to find someone else trying to live on the same amount we are. We took a drastic pay reduction so that I could stay at home and my husband could take a job he’s always wanted. After all withholding and other deductions we bring home $2100/month which is less than 1/2 of what we used to make. I look forward to reading your posts to see how you make this work. It feels like such a struggle right now.

    • Christina,
      Thanks so much for the encouragement! How exciting to be debt-free :) The moving expenses might end up being a blessing in disguise if we can ever actually sell our house…

      Here is my grocery budget post, And, you may have already found these, but here is how we cut $190/month in expenses, and how we cut $440/month in expenses. That is kinda how we make it work. I also meal plan, which helps tremendously with the grocery budget. And, I’m working on a project that I’m hoping to finish by the end of the year to help with the $200/month grocery budget as well.

      Thanks for your encouraging comment.

  9. Just a thought, if you changed your deductions on your paycheck, you could have that extra money every month. Since you want to pay a large sum on your debt anyway, when you get your tax refund, you could be doing it every month instead. You may also save more interest that way, too.

    • Chris, thanks for the advice! You’re right, I’m sure it would save more in interest. We’re considering doing that :)

  10. That’s awesome! When you have the motivation and inspiration, anything is possible! Best of luck to you on your journey!

  11. I have been reading all of your financial blog posts and I am finding them amazing, I really appreciate you taking the time to post a blog, especially one where you are so open and honest. I have read all about/researched Dave Ramsey's books and other materials and while he does have quite a few good suggestions, everyone's financial situations are different and you have to think what is realistic for you to do and feel comfortable with! What a blessing it is that you have found a way to budget and figure out what it will take to pay off all the debts. 6-7 years is WONDERFUL, and more realistic for the "typical" financial situations. I LOVE that you put out all the info and numbers to figure out when you would potentially be debt free, that is exactly what I am doing tonight! Thank you again for sharing, God Bless! May you and your family be financially free and abundantly happy (:

  12. I have been reading all of your financial blog posts and I am finding them amazing, I really appreciate you taking the time to post a blog, especially one where you are so open and honest. I have read all about/researched Dave Ramsey’s books and other materials and while he does have quite a few good suggestions, everyone’s financial situations are different and you have to think what is realistic for you to do and feel comfortable with! What a blessing it is that you have found a way to budget and figure out what it will take to pay off all the debts. 6-7 years is WONDERFUL, and more realistic for the “typical” financial situations. I LOVE that you put out all the info and numbers to figure out when you would potentially be debt free, that is exactly what I am doing tonight! Thank you again for sharing, God Bless! May you and your family be financially free and abundantly happy (:
    Reply · Like · Follow Post · 2 seconds ago

    • McKinzie, I’m so glad you were able to find encouragement here! I was really astounded when I sat down and crunched the numbers because I was so used to thinking nothing could be done. I pray you’ll find a light at the end of the tunnel by getting things down on paper as well.

Trackbacks

  1. […] on other expenses) -Is Frugality Worth It? ~Create Your Own Budget ~Why We don’t use coupons -Our Snoball Plan (to be debt free in 7 years) -How we “Found” an extra $190 in our budget   -When Life Throws a Curve Ball (& […]

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