Debt Snowball: We paid off $50,000 in 3 yrs

Not everything in the personal finance world is pure optimization of assets through the use of beautiful spreadsheets. Don’t get me wrong, there are a lot of spreadsheets, and they are all beautiful, but sometimes decisions are emotional. Making some financial decisions for emotional reasons despite the math needs to be normalized. We like the quick “wins” of closing those smaller loan accounts early with the debt snowball method. It keeps us motivated to continue.

Why the debt snowball method?

Retail therapy might end up problematic but paying down debt because you gain a lot of psychological satisfaction is perfectly acceptable. Sure, you might be better off investing the over-payments in the market at 7% growth compared to paying down the loan at 4.5% in the long run on average. We all know that. It doesn’t change the fact that I gain more satisfaction from closing those loan accounts than possibly achieving financial independence marginally faster.

You need motivation

Before I get to how we paid off a lot of debt, I think it is important to know the why. We are both relatively risk-averse people. Our emergency fund was WAY over-funded for way too long because we just slept better at night knowing the cash was there. We waited too long to invest because it seemed too risky as well. Paying down our debt was just an extension of using our money for the lowest-risk returns. We would just feel safer knowing we had no debt.

Another motivation that never occurred to me until writing this article was a family history of financial uncertainty. Both of our fathers were laid off from well-paying careers without a lot of warning in their late 40’s or early 50’s. That is a case for having a healthy emergency fund but also for aggressively paying down your debt. A sudden shift in income is much easier to handle when your monthly expenses are that much lower in a debt-free life.

If you need more motivation, there are a lot of places to look in the FI community. His and Her Money regularly interview couples who crushed their debt, and it is inspiring. The Dave Ramsey show is nothing but people discussing their path to being debt free. ChooseFI has interviewed many guests with encouraging stories of paying down their debt. Find one that resonates with you.

Debt Snowball ?

The debt snowball is currently the closest I’ve come to having an actual snowball in my life. As someone who has lived most of his life in Florida, they are understandably hard to come by in their natural habitat. You heard that right. I’m someone who has only seen snow fall once in my adult life. Gasp! The horror! What?!?

Hey… Floridians have other things that totally make up for the lack of snow (or cold weather in general). We have beaches, theme parks, and a near infinite supply of alligators. We see one alligator so often in a pond near our house, we named him Steve. Steve probably paid off that pond years ago, so this story won’t be very useful to him.

I think it is funny

I don’t know why imagining a zany morning zoo radio show with hosts Snowball and Avalanche is so funny to me but it is. I’m imagining a Click & Clack style call-in show where they discuss the debt snowball and avalanche methods to help their audience get out of debt. Their producer, off-mic killing it with the sound effects. We all learn, laugh, and cheer. Apologies to all the non-finance nerds for that diversion. Back to the story.

Get to the actual method, smart guy

I went into more detail on my post earlier this week on paying down high interest debt. Head there and read over the reasoning for why paying down the debt is so important. For the sake of time I’ll summarize it here so it’ll be easier to follow our story on becoming debt-free below.

The debt snowball method starts by taking all of the debts you have (except your mortgage) and sorting them from smallest balance to largest balance. Once the order is set, make sure you are paying the minimum payment on all of the accounts every month as a base.

Each month as you pay the minimums on your loans, add any extra money on top of the first loan on your list (ranked earlier). Keep paying those amounts every month until loan #1 is paid off.  Once that occurs, take the entire amount you were used to sending loan #1 and start paying that on top of the minimum to loan #2 (loan #1 minimum + loan #1 minimum + extra money). Keep paying those amounts every month until loan #2 is paid off. Repeat until you are debt free.

Our debt situation

I’ll be the first to admit that our debt situation isn’t as bad as many others out there. We had no high interest credit card debt, no personal loans, and manageable monthly payments. Others aren’t so lucky. The mid-range interest rates on the debt made choosing the debt snowball method easier as well. You really should pay down high interest debt first like credit cards, regardless of their relative balances.

Not counting our mortgage, we had three loans remaining when we started this process three years ago. At the time we had a car loan and two student loans totaling $50,000 that amounted to $800 a month in payments due. It isn’t an overwhelming amount necessarily, but that is $800 a month out the door immediately we can’t invest or otherwise use.

Loans Outstanding

• Student Loan #1 – $6,000
  • $200 monthly payment
  • 3 Years remaining
• Car Loan – $11,000
  • $350 monthly payment
  • 3 Years remaining
• Student Loan #2 – $33,000
  • $250 monthly payment
  • 15 Years remaining

Step 1: How much money do we have to crush this debt?

As noted above, the total loan payments we had to make each month was $800, so that was the bare minimum. We went through our income statement and determined that we could afford an additional $300 toward debt reduction. See our post on building one your own income statement here. That means we had $1,100 a month to play with.

I’d love to pretend that some serious financial analysis went into determining that $300 surplus. It was mostly because sending $500 a month to student loan #1 ($200 due + $300 extra) seemed like a nice round number. I also made sure that the extra $300 a month fit into our budget because I’m not completely irrational.

Debt Snowball Step 2: Let’s get this party started

The extra $300 a month paid on student loan #1 helped pay off the debt in one year instead of the expected 3 years. This not only saved us 2 years in payments but around $175 in interest expense over that time period too. Next we rolled that $500 that used to go to Student Loan #1 and started sending that to the Car Loan as snowball bonus money.

Debt Snowball Step 3: Rinse & Repeat

This part will look odd on paper since we more than doubled the monthly payment on our car loan from that point forward. It only seems like a lot until you peek down at the Total Paid sum at the end of the month. It hadn’t changed. 

We were comfortable with $1,100 as a loan expense in our budget last month and would be the next month too. That is the entirety of the secret sauce in the debt snowball method. The amount being paid each month never feels overwhelming because it remains the same regardless of how many loans you have left to pay. Out of sight, out of mind.

The extra payments that went to the car loan allowed us to pay it off about 9 months later (21 months into the plan total) instead of the 3 years on contract. We also saved around $120 in interest expense which isn’t a lot but a hundred bucks is a hundred bucks. I’ll take it.

Debt Snowball Step 4: Can’t Stop, Won’t Stop

Our final stop on this debt crushing tour is the bane of my balance sheet. A huge student loan that just didn’t seem to go away despite all of the payments I’d thrown at it in the past. Thanks to the debt snowball we then sent $1,100 a month to the final student loan and rapidly saw that balance drop each payment. It was very satisfying to watch.

The large overpayment each month allowed us to pay off the entire second student loan just 15 months after the car loan (38 months into the plan). This shaved nearly 12 years off of the repayment schedule on the student loan and saved us around $10,000 in interest expense.

Side note:

Quick Note for those doing the math with me here. Toward the end of the life of the second student loan we started getting antsy to pay it off. The company I work for pays out a bonus at the end of the year depending on performance, and we opted to put that toward paying off debt. It amounted to two lump sum payments of $6,000 each. It shaved one year off the timeline to pay off.

Second note: this was our journey to becoming debt free, so these are our numbers. If your debt is higher or lower in volume or the interest rates vary from mine you could save a different amount of time and money. I will say that all of our loans were under 5% APY, so if you have more consumer debt like credit cards you will likely save a lot more in interest expense.

Cool. What did you do after that?

We debated what to do with the $1,100 already allocated in the budget to loan payments that we had become used to over the last three years. Should we go all Dave Ramsey on our mortgage to knock that out soon or invest it?

In the end we split the decision and did both. I calculated what our mortgage payment would need to be each month to pay off the house in 5 years, and we are investing the rest. You could probably guess but that figure is totally arbitrary again. It just seemed nice to have only 5 years left on the mortgage even though it might be more optimal to invest it all.

You didn’t celebrate?

Of course. Like any frugal FI couple we celebrated paying off our student loans with some Trader Joe’s champagne because it is delicious and only $6. Then we wanted to tell everyone about our success because we were so excited. Unfortunately, personal finance is an oddly taboo subject you can’t just talk to people about openly. It isn’t fair really.

I wrote about how it can be kind of lonely on the path to financial independence, and it is especially true when you have nobody to share your success with. So we are sharing with you in the hopes that you can replicate our success. Share your story below in the comments so we can all celebrate together. It shouldn’t be so lonely.

Lasting Effects

Living debt-free except for the mortgage (we really need a term for this in the FI community!) has a lot of positive down-stream effects on your life. There are the obvious ones like having a smaller monthly expense figure which allows you to keep a smaller emergency fund. Lower monthly expenses also mean a lower FI Number or amount you need to be truly financially independent.

The less obvious advantages involve an overall stress reduction and the ability to spend more of your time as you see fit. Lower debt and expenses means you have more freedom of choice in all aspects of your life. I wrote about what FI means to us in a separate post I recommend you read because it means a lot to us.

TL;DR

We used the debt snowball method to pay off $50,000 in debt in 3 years. It shaved 12 years off of the payment timeline and saved us over $10,000 in interest.