Everyone has heard of the debt snowball, that is paying off the highest interest debt first, then afterward going after the next highest debt.  There has actually been a lot of debate (arguing) about whether the debt snowball really matters so much in the beginning, since a lot of people would prefer to go after just the smallest debt first, no mater what interest rate is tied to it.  The idea is along the emotional idea that if someone is heavily in debt, at least they will have the feeling of accomplishment, and will then have a better mentality to fight the debt.  To try to put this argument to (somewhat) a rest, I thought it might be a great idea to actually see what affect the debt snowball method had by applying it to a chart.

 

If we took the following example:

 

 

 

We first sort all of our debts from the highest interest rate to the lowest interest rate.  Then we take our highest interest rate debt (Debt 1), and apply more than the minimum monthly payment to it.  That means instead of $20 or $30 for that month, we apply $500 to the $291.92 debt, then roll the leftover to that payment to Debt 2.   We continue to roll the payments over until all debts are paid.  This is a chart of what the individual debts look like, as they get wiped out one at a time:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

When I then wanted to chart the total debt reduction on a chart all by itself, I was surprised to see that the dropping debt didn't look so exponential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What Happened?  In order to see a "real" exponential decay curve, accelerating the drop off toward the end of the chart, you have to pay on the debts in smaller increments over a longer period of time.  It appears that if you do feel it necessary to pay down just any small bill first, it will not have that much of a negative impact, as shown by the graph.  Keep in mind, however, you will save hundreds of dollars in interest payments as well as several months of paying your debts by paying in a debt snowball type process.

Your Turn - The Spreadsheet Downloads  Now you can try to apply the debt snowball process to your own debts, by downloading 2 great spreadsheets.  The Debt Reduction Snowball Calculator (Spreadsheet) by www.vortex42.com is a very elegant spreadsheet that can get you set up on a debt reduction plan in just a couple of minutes.  For those who would like a little more detail, you can check out Mr_Peanut's Debt Snowball Calculator as well. Both of these sheets will allow you to customize the best plan for you to pay down your debts.   
 

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