Example
An example of the debt-snowball method in action is shown below.
(This example does not add in the accruing monthly interest of the credit cards and loans making the balance amounts higher and payoff time longer.)
A person has the following amounts of debt and additional funds available to pay debt (the debt is listed with the smallest balance first, as recommended by the method):
- Credit Card A - $250 balance - $25/month minimum
- Credit Card B - $500 balance - $26/month minimum
- Car Payment - $2500 balance - $150/month minimum
- Loan - $5000 balance - $200/month minimum
- The person has an additional $100/month which can be devoted to repayment of debt.
Under the debt-snowball method, payments for the first two months would be made to debtors as follows:
- Credit Card A - $125 ($25/month minimum + $100 additional available)
- Credit Card B - $26/month minimum
- Car Payment - $150/month minimum
- Loan - $200/month minimum
After two months (presuming the person has not added to the balances, which would defeat the purpose of debt reduction), Credit Card A would have been paid in full, and the remaining balances as follows:
- Credit Card B - $448
- Car Payment - $2200
- Loan - $4600
The person would then take the $125 previously used to pay off Credit Card A and apply it as additional payment to the Credit Card B balance, which would make payments for the next three months as follows:
- Credit Card B - $151 ($26/month minimum + $125 additional available)
- Car Payment - $150/month minimum
- Loan - $200/month minimum
After three months Credit Card B would be paid in full (the final payment would be $146), and the remaining balances would be as follows:
- Car Payment - $1750
- Loan - $4000
The person would then take the $151 previously used to pay off Credit Card B and apply it as additional payment to the car loan balance, which would make payments as follows:
- Car Payment - $301 ($150/month minimum + $151 additional available)
- Loan - $200/month minimum
It would take six months to pay the car loan (the final payment being $240), whereupon the person would then make payments of $501/month toward the loan (which would have a $2800 balance) for six months (with the last payment at $234).
Thus in 17 months the person has repaid four loans, with two of them being paid in a mere five months and three within one year.
Read more about this topic: Debt-snowball Method
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