April was a great month for us in terms of paying off debt.
We wiped out our car loan 14 months ahead of schedule (more details here). Watching that balance shrink was thrilling and seeing it finally reach zero felt like Christmas morning. That’s how exciting it was for me.
But the excitement did not last long. Don’t get me wrong, I’m proud of what we accomplished but the hard work is not finished.-
We still have an $8K credit line to pay back. And then there’s the $50k student loan to face.
It would be easy to get discouraged looking at what’s ahead. Sometimes I see those numbers and wonder if we’ll ever be able to pay it all off.
The discouraged feeling doesn’t last long, though. That’s because we have found a strategy that has made paying off debt easy: the snowball method.
What is the snowball method?
The snowball method is all about building momentum.
You start by putting your debts in order from smallest to largest.
After you make minimum payments on all your debts, you turn your attention to the smallest one, paying as much on it as you can. Once that balance is paid in full, you repeat the process – but you roll everything you were paying on your smallest debt onto the second smallest debt.
Rinse and repeat until all balances are back where they should be: zero.
I can’t take credit for creating this method. What I can tell you is this: it works.
Creating our debt snowball
In our case, using the debt snowball meant tackling our car loan first.
It isn’t the debt we have held the longest – that’s the credit line – but thanks to steady, monthly payments, it was our smallest.
This is how our debts looked in order around the end of 2017:
Car loan – ~ $6K
Credit line – ~$9K
Student loan – ~$50K
(Rough totals. Looking back, I wish I had done a better job of tracking exact balances. Lesson learned.)
Our car payment was $286/month. The credit line does not have a monthly payment, but it does withdraw interest at the end of each month. In an effort to keep the balance moving down, we have been throwing $20/week on it for a while.
To allow us to focus on our other smaller debts, we applied to make interest-only payments on the student loan. That brought our minimum payment from $400+ to about $230/month.
After making all those minimum payments and covering our expenses, we tossed as much extra money on the car as we could. The amount fluctuated over the course of repayment, but averaged about $575/month.
It other words, we were putting about $1,170/month toward debt. That’s more than our rent.
Building the snowball
With the car paid off, it would have been easy to bring that $286 we paid each month for the car into our family budget but that’s not how the snowball works. Instead, we shifted our resources to the next debt in the queue – the credit line.
Needless to say, going from paying about $80 a month (plus interest) on the credit line to paying $1,000 a month changes the outlook on how long it will take to pay it off.
Proceeding at this pace, the credit line will reach a zero balance in December.
By the end of 2018, we will have paid off approximately $15K of debt.
Why the snowball method works
It sucks seeing so much of our hard-earned cash goes toward debt each month. We spend more on debt than we do on rent. That feels wrong.
But there is a silver lining in all of this: our aggressive approach is yielding results. And that’s why this method works so well.
By starting with our smallest debt, we were (somewhat) quickly rewarded with the desired result: a zero balance. Achieving that first goal showed us it is possible to make meaningful progress in our debt repayment journey, motivating us to keep going.
The snowball method works because once you’re rolling, it doesn’t feel like a sacrifice.
In our case, all the money we are putting toward the credit line now was already allocated for debt repayment.
That means we don’t have to make changes to our lifestyle — unless we want to. The small amount we added to the repayment does not make a big difference in terms of how much we have available to us in the family budget. While there are some weeks where money is tight, we have enough to pay for the things we need (like gas and groceries) while still having some money available for fun.
The snowball method works because it’s results driven. Focusing on the smallest debt first means you’re rewarded with a zero balance faster. Results motivate you to keep going.
Of course, it’s not the only method out there — and depending on your individual situation, it might not be the best one. For example, if you have a lot of high interest debt in the mix (like a credit card), it might make more sense to focus on those debts first.
At the end of the day, if your goal is to pay off debt, progress is progress. The snowball method works for us — you do what works for you.
Which method are you using to pay off your debt?