Wednesday, June 6, 2012

Introduction to The Debt Snowball

I mentioned a few weeks back that I would be re-focusing my financial attention on the speedy repayment of my student loans.  The method I've chosen is called the "debt snowball," which I first heard about from Couch Potato Athlete (a.k.a. The Runny Egg) (here), and she read about it from Dave Ramsey (here) (Jewish girl warning:  there's quite a bit of God talk in Dave Ramsey's book.  It's not a Jewish God, so if that kind of thing bothers you then be forewarned).

The basic idea behind the debt snowball is that you stack up all of your loans from lowest balance to highest balance.  You then make the minimum payments on each loan and then throw every extra red cent towards the loan with the lowest balance until you have killed it.  The next month, you again pay the minimums on each loan, but now you take each extra red cent, PLUS the minimum payment that you were paying towards the smallest loan and you apply it to your next highest loan until it has been cold-bloodedly murdered.  

The idea is that you end up creating a bit of a snowball, so that by the time you get to your largest loans you are throwing huge chunks of money at them until they are gutted in their sleep and left to die in a pool of their own blood and intestines.

[image removed]

(OMG, do not google image search "bloody snowball."  People are sick!)

Those of you who understand interest rates will observe that this is not the most mathematically optimal method of loan repayment.  The success of the method is generally based on psychology in that most people feel motivated to continue on a difficult path after accumulating a few small "wins," i.e., the repayment of small debts.

So here's what I did:

1.  I made a detailed list of each of my loans.  I broke down each loan into components; I have several loans that seemed huge, but once I looked at the statement detail I realized that this seemingly huge loan was actually a large loan group made up of smaller loans.  I'm focusing on each individual loan.

2.  I identified my smallest loan.

3.  I determined my monthly disposable income that will be the money I can throw at my smallest loan until it has been bludgeoned to death.  After rent and $100/week for food and fun, that amount is $1,000.

4.  I am suspending payments to my 401(k) for a year as a preliminary emergency measure.  That hasn't kicked in yet, but once it does that will add another $500 to my monthly disposable income that will go towards the snowball.

5.  I calculated my current snowball.  There is only one loan I have that has been consolidated, and I don't plan to consolidate my other loans, so my initial snowball was $66.

6.  I owe money to my parents for pre-job expenses, and after hearing about my debt repayment plan, my father offered to defer repayment of my interest-free loan until April of 2014 in exchange for a small interest payment.  That added $500 to my monthly snowball.

Here's where things stand at the start of this adventure:

For the sake of some degree of financial privacy, I have only approximated my loan balances.  I include the approximate balances because I saw in your comments that at least some folks are in a similar student loan situation as I, and I assume it will make you feel a bit better to see that I have a long way to go as well.  Again, three Ivy League degrees don't come cheap.

As you can see, many of my loans are under $5,000 each, but those minimum payments really add up.  Once all of these small loans are cruelly assassinated, I will have an extra $840 to add to my snowball ($566 finished minimum payments + $1500 monthly income) to slaughter the <$10k loans.  Once I slit the throat of the <$10k loans and laugh while they exsanguinate, I will add $435 to my $840 and $566 and $1500 for a total of $3341.  And so forth.

And that's the snowball!  

I'll keep you posted on my repayment progress at the top of each month, and I'll continue to explore financial themes as they come up in my life.  I'm ruminating on a few topics as we speak, and I'd love to hear your suggestions, success stories, and general thoughts!

1 comment:

Anonymous said...

I just graduated from law school as well and the loan repayments are indeed daunting! I'll be following along as you embark on this new schedule. My plan has just been to pay every two weeks so interest doesn't accumulate as fast and more of each payment goes to principal, and then make large lump sum payments applied solely to principle on the opposite weeks.

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